How to Analyze Your Business's Profit
9 of 11 in Series: The Essentials of Keeping Your Business Accounts
Analyzing your business's profit is not rocket science: Basically, you just need to determine how and why your business is (or isn't) making a profit. To figure out your business's profit history over a certain period of time, ask yourself these questions:
How did you make profit? Actually, you can answer this profit question three ways:
Answer # 1: You earned a total margin that's more than your fixed expenses.
Answer # 2: Your sales volume exceeded your break-even point.
Your break-even point is the sales volume at which total margin exactly equals total fixed expenses.
Answer # 3: Your high sales volume diluted fixed expenses per unit to below your margin per unit.
How did you increase profit? To best answer this question, you can calculate the effect of changes in sales volume and the margin per unit to determine why your profit increased.
If you experienced a significant increase in your margin per unit, you may not be able to repeat this performance in the coming year; you may have to increase sales volume to boost profit next year.