Profitability - A Key Financial Perfomance Indicator

Every business needs to be profitable to be successful. The profit of the business is the so-called bottom line and indicates whether the company still has a cash surplus after all costs have been deducted from the revenue it has generated from sales.

Having a business generating profits is key to its success and is an essential outcome of running a business. Usually when a business is proposed or a start-up is planned, profit is the primary goal. Profit provides the business with funds (capital) which management can use to re-invest in the business, distribute to shareholders, invest in new products, employ new personnel etc. Profits encourage the business to flourish and grow.

Profit indicates that the business is generating more than it is spending which will normally ensure its survival. Profitability is key to investors looking for opportunities and for management wanting to increase revenues.

Types of Profit

The Income statement, which is part of the Financial Statement, is prepared by accountants is the primary indicator of Profitability. Normally, income statements will show 3 levels of Profitability being:

• Gross Profit- This is the company’s revenue less the direct cost of the goods sold
  Revenue - Cost of Sales = Gross Profit
• Operating Profit- This is the profit after deducting from revenue the cost of goods sold and all the operating expenses.
  Gross Profit - Operating Expenses = Operating Profit
• Net Profit – This is the profit after deducting the cost of goods sold, less the operating expenses and after deducting interest and taxes.
  Operating Profit - Interest and Taxes = Net Profit

There are other definitions of profitability, but Fingenie prefers to stick to the actual figures that make up the Income Statement.

Improve Business Profitability

FinGenie uses profitability as one of its key financial performance indicators. We use Net Profit after Tax as our measure of profitability and we covert it into percentage terms when applying it against our revenues or sales. We call this Return on Sales or ROS. A high ROS indicates strong profit generation. 

A low ROS means that business management needs to intervene to achieve better revenue and / or lower costs. Low profiability still raises questions about whether you would be better off leaving your money in the bank, or maybe investing in a more profitable business.

Fingenie allows you to set targets for Sales Revenue, Cost of Sales, and Expenses, and shows you want the effect of these new targets will have on the business profitability. With Fingenie you can monitor your monthly progress towards meeting your targets. 

How does this help the Business Owner / Business Manager?

Profitability is the first step towards running a successful business. If you can’t sell your products for more than all your business costs, your business cannot succeed. FinGenie shows you what you can do to take control over your profitability and shows you the potential of your business and what it could look like.