How to turn around a struggling business

How you can improve your profitability

Guide

There are several options to consider which may improve the profitability of your business, such as increasing trade or re-evaluating individual or entire financial aspects.

Whatever area you exploit, you will need to know your business inside out to improve performance and maximise the potential for profit. For more information, see strategies to improve sales and profitability.

How to check and measure profitability

Apart from ensuring your cashflow is under control, you must also regularly check your profitability.

The net profit is the amount of money left after paying all your bills. It determines how much money you can safely take out of the business for your living expenses and to pay taxes.

You will receive an annual set of accounts from your accountant. However this can be up to nine months after the end of the financial year. You need to check profitability much more frequently and more promptly, using monthly or weekly figures.

A good approximate measure of profitability is the gross margin. The gross margin is the value of sales less the direct cost of sales. So, if sales are £200 and the cost of sales were £120 the gross margin is £80 or 40 per cent on sales. Gross margin is a unique basic comparison of differing businesses.

Secondly, to calculate the profitability of a business all you have to do is to deduct the business' overheads from the gross margin. So if the gross margin is £1,000 and the overheads are £600 the net profit is £400. Overheads tend to be fixed in the short term so gross margin becomes a good indicator of profitability and can be calculated quite simply.

For more information, see set up a simple profit and loss account for your business.

Alternatively, your accountant can help you set a basic measurement of your gross margin on a weekly or monthly basis. They can also help you understand other important ratios in your accounts.