How to simply determine the profitability of a business

Profitability is the basis of the conduct of any type of business: from copy services to large construction projects. In economic science there are a large number of theories, coefficients, indicators with which you can calculate profitability. But what if there is no corresponding education, and there is neither desire nor time to sit pore over a mountain of books?

You will need

Computer, sheet of paper, pen.

Instruction manual

1

First of all, it is necessary to determine the very concept of profitability and to understand why it should be determined at all. Profitability is such a state of your business that with the costs you have to create and operate (that is, current expenses) and with your orders, customers, sales (in other words, with future revenue), it can bring net income to its owner. Roughly speaking, you bought a product, you sold it, and what remains of you after these actions will constitute profitability.

2

Determining the profitability of a business is necessary to establish the feasibility of conducting this business itself. To calculate profitability, economists advise using complex indicators of the project’s economic efficiency and business profitability, that is, calculate factors such as NPV, IRR, IP and many others. Such a complex calculation is really advisable for determining the profitability of investing in a business of large investments.

3

However, for a simple business, settlement can be simpler. For example, you decide to do copying services. First of all, you need to calculate the investment costs, which in this case will be the funds spent by you to buy a printer (about 5, 000 rubles), cartridges (1, 500 rubles per 1, 000 sheets). Suppose you have a computer. Thus, your investment will amount to 6500 rubles. Next, we consider current costs: a sheet of paper at the rate of 0.5 rubles. per sheet, electricity - 0.3 rubles. on the sheet. Thus, current costs will amount to 0.8 rubles. per sheet.

4

Suppose that you can order a printout of a sheet from you via the Internet, and the customer himself comes to your door. Thus, the cost of one sheet with printed text will be 0.8 + 1.5 = 2.3 rubles. You set the price per sheet in the amount of 5 rubles. and daily print out 100 sheets to customers, while your revenue will be 100 sheets * 5 rubles. = 500 rub. In this case, your costs will amount to 2.3 rubles. * 100 = 230 rubles. Thus, your profit per day will be 500 - 230 = 270 rubles. That is, the business is profitable.

5

However, when determining profitability, it is necessary to take into account lump sum costs of 5, 000 rubles. to buy a printer. If daily your profit will be 270 rubles, then pay back your investment in the amount of 5000 rubles. It will be possible in 19 days (5000/270). Thus, after 19 days, your business will be profitable.

business profit