Measure Your Profitability, Then Grow Your Business!

Apr 16, 2021

Measure Your Profitability, Then Grow Your Business!

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Anyone can sell something. For example, you could list your minivan in the classifieds right now and probably have it sold by tonight. The question is, would the transaction be profitable for you? Your minivan might have immense value to your family—so the sale price would need to be on the higher end of the spectrum before it would make sense for you to sell it.

If you were to make a profit on the van sale, you’d likely consider the transaction a success. You’d determine the profit by taking the revenue from the sale and then deducting the expenses associated with the sale. Since this hypothetical situation gets a little messy because it’s hard to determine the exact value of your car, let’s go with a simpler scenario.

Let’s instead say that you found a rare trilobite fossil while working in your backyard and decided to sell it. You buy a special brush online that helps you to clean the trilobite and make it as presentable as possible. Next, you list it on an online classifieds site that caters to fossils. Within 48 hours, the trilobite sells for $500 to a collector in Detroit, and you receive an instant payment through PayPal.

To see how the profit situation played out, you’d need to subtract all the expenses from your revenue of $500. They include:

  • $10 for brushes
  • $10 for listing on a classifieds site
  • $35 for shipping to Detroit
  • $15 for the PayPal fee

In this ultra-simplified example, your net profit on the trilobite sale would be $430. Not bad at all for a random fossil you bumped into while tilling your garden.

The profitability of your fossil-selling efforts is closely tied to these same numbers, but it’s not quite the same as the profit. While calculating the profit produces an absolute measure for the sale, profitability uses a relative measure, a percentage, that allows you to gain a different perspective on things.

To highlight the difference, let’s say that you find 3 more trilobites in your yard and sell them for an identical price and with the exact same expenses—that collector in Detroit is a real trilobite fan. You’ve now brought in total revenue of $2,000, with a final profit of $1,720.

As you strut down the sidewalk, gleefully counting your money, you notice that your neighbor is cleaning trilobites in his garage with the same type of brush that you use. You amble into his garage and ask him if he’s also a fossil dealer. He nods and tells you that he sells 10 trilobites every fiscal quarter to a voracious collector in Detroit.

You then discuss your methods for selling the fossils. His costs turn out to be higher, so he’s made a profit of $1,720 on his 10 sales.

Here’s where we make our distinction between profit and profitability. You and your neighbor made the exact same profit on your transactions, but his profitability is lower because he has to spend more money on his brushes, shipping, and PayPal fees than you do in order to generate a similar profit.

Let’s say that you and your neighbor continue your operations into the next quarter, but the cost of brushes has gone up by $5 per pack. That extra cost will cut into your profit somewhat, but it will have a bigger effect on your neighbor because he’ll be buying more of them than you. His profitability will plummet even further due to this new development.

About the Author

Grant Olsen

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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