You may have been in a business or running your own business for a while now without really using your data to its best abilities. Running a business can be mentally rewarding and highly profitable when it’s done correctly and profitability analysis is a powerful tool to achieving just this.
It’s essential to benchmark your progress periodically to see how well you’re doing and where your business can grow.
Examining your financial data can help you determine your return on assets (ROA), return on investment (ROI) and profitability ratios. These figures allow you to dive deeper into your results and give a clear indication of your progress as well as help you formulate better business strategies.
Using Profitability Analysis to Grow Profits
Having a clear picture of your profit margin ratios can also provide the financial information needed to grow your company’s profits. Analyzing the data where revenues are increasing or decreasing may offer you an opportunity to take advantage of specific growth opportunities through business forecasting. It can also indicate elements that should be geared back to create fewer expenses.
Your Balance Sheet and Income Statement Provide Valuable Insights
Your business’s balance sheet and income statement can reveal assets, liabilities and your company’s net worth. With this data a seasoned accountant can quickly determine your business’s ability to continue operations and generate profits. You can read more to learn the nitty gritty of the profitability analysis process or reach out to us to find out if we’re a good fit to grow your company.
What Is Profitability Analysis?
Looking at your balance sheet and income statement’s current state is vital in ensuring you are running a healthy business. However, running a profitability analysis simultaneously is essential as it offers the ratios you need to understand where your profits are being generated. If you’re unclear about or wondering what profitability analysis is, it’s easiest to explain by examining a few key profitability ratios. These include the following:
- Operating Profit Margin Ratio
- Gross Profit Margin Ratio
- Net Profit Margin Ratio
To determine these ratios, you’ll need to use figures from your income statement, such as net sales, cost of goods sold, operating costs and administrative expenses. Once you determine each ratio, you are able to analyze your business more accurately. Each ratio can help you measure efficiency and indicate how well your business is progressing. For example, if you have a higher gross profit margin in Q2 than Q3, you can determine why this occurred. Examining historical profit margin ratios is often one of the best predictors of long-term growth and health for your business.
Keep Tax Worries at Bay
Examining your company’s historical profitability ratios can also make it more straightforward to develop a tax planning strategy. Ensuring you have a plan in place for paying your taxes each year can help relieve stress and safeguard you from not having enough funds available to cover your tax obligations.
What CFOs and Controllers Do
If you need specialized assistance when examining your profit margin ratios, you may want to make use of an outsourced CFO and controller team like Fusion CPA (read: CFO vs. controller). We’d be happy to discuss the options available for stabilizing, analyzing and growing your business. .
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.