When looking for a business’ profitability, you’d have to first realise what a ‘profit’ is. Profit is the financial gain that was created out of business operations. However, it is not the same as money on hand or in the bank (although it’s expressed in a dollar amount). All the expenses and costs in creating that income need to be taken into account.
What should be looking at?
Instead of merely profit, you should look at NET profit. That is, revenue less expenses. If expenses exceed revenue, then you have net LOSS. This figure is the highlight of the Profit and Loss report.
Net profit margin affords you the ability to compare quarter to quarter results. Income, expense and profit will vary from each quarter. Sometimes, it can be difficult to assess if your business is gaining a profit. You might assume an increase in sales means more profit but that may not be necessarily the case as expenses might increase at an even higher rate.
How to calculate your profit:
To calculate your profitability, you can start by doing a net profit margin analysis of your profit and loss report.
The formula to follow is
Net Profit Margin = Net Profit / Sales x 100
So if your net profit is $20,000 from total sales of $100,000.00 your Net Profit Margin would be 20%. In other words for every dollar you earn 20 cents is your profit.
What target should you be aiming for?
There is no right answer for this question. Firstly it needs to be positive (that you are actually making a profit). After that your target should be as high as possible and take into consideration the risk you are taking.
As a licenced venue you are exposed to greater compliance and risk and therefore you need to make sure that you are being compensated for that risk. If you can’t achieve the extra target it might be safer to take a less risky job or business.
Schedule a confidential discussion with one of our hotels specialist advisor here if you would like to talk about your venue's profit margin in detail.
What affects profitability?
To better understand how to gain profit, you should understand the concepts of profit margins and profit drivers. These will help you develop strategies to increase profits, including sales drives, tweaking the prices of products and services and decrease overall costs in producing the product or service.
Any change that affects sales and expenses can affect your profit margin. Whether the change is voluntary (implemented by you) or involuntary (nature, calamities, legislation changes, supplier price increases), it will influence the net profit margin ratio.
The natural course of a business cycle can also affect profit levels. There will be a time where a business will plateau and you may see decrease in sales or revenue. That doesn’t mean you just have to go with the flow, it just means you have to be ready to react with the market to drive future sales.
If you’d like to gauge your business’ profitability, contact our PJT hotels specialist division today. You can set a no-obligation consultation with us through this form.
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Hotel Business Advisor
The Ravi Mantra is “If you know better you will do better”. Raised in a household with strong beliefs in a good education and continual life long learning, my purpose is to help my clients and colleagues learn, improve their craft and grow their knowledge.
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