Business owners knows that having profits is the key to success. However, it’s important to have a profitability formula, as it does help streamline the process. Implementing a good profitability formula is going to help you boost success. Plus, it can alleviate some losses, since you have a good understanding of how everything works and what it will all entail, which means you can use that to your own advantage.
Why every business needs a customized profitability formula?
The reason is simple: no two businesses are the same. That means you can’t expect the same profitability formula to work for everyone. Customizing it and adapting to the specifics of your business is the right approach. Plus, it will help ensure that you have a very good idea of how you can boost profits, based on your own data.
The limitations of generic profit calculations
If the profit calculations are generic, usually they won’t be accurate. That’s because you want to use real, comprehensive data based on what you are using right now. And having that accurate data is going to make a huge difference. A lot of companies these days rely solely on general formulas, and that can prove to be a downside in the long term.
How different industries use unique profitability formulas?
Every industry has their own profitability formula, and you can further adapt it to your needs. For the toy selling industry, you can focus on metrics like acquisition costs, repair costs, etc. In the books industry, knowing profits will help you determine how many books you make, and it could help offset costs.
Steps to develop a custom profitability formula
Generally, when you create a custom profitability formula, you want to know specific pieces of information when it comes to revenue. Obviously you start from “Profit = Sales Price – Costs”. However, for your specific situation, you can also add in things like production costs, sales commissions, affiliate costs, everything pertaining to your specific business type. That’s the thing, every company will have a multitude of different situations and challenges, so addressing that can help more than expected.
Identifying key cost and revenue components
- It’s imperative to calculate the total revenue, which means adding up your sales, and then subtracting refunds and returns.
- After that, you want to know the costs associated with producing and selling these goods.
- Calculate gross profit by subtracting the COGS from the revenue.
- You also need to calculate the operating expenses, depending on the business these can vary quit a lot.
- Lastly, you calculate the net income, where you subtract the operating expenses from the gross profit.
Factoring in fixed and variable costs
Every type of business will have fixed costs, but also variable costs. Those things are something to consider when you establish a profitability formula. It will make it easier to narrow down the potential costs, expenses and anything associated with that. We highly recommend to automate fixed costs when calculating the profitability formula, and then manually add in variable costs, due to their nature.
How to automate profitability tracking in WooCommerce?
If you are using WooCommerce, a very good idea is to try and track all of that manually. While it involves quite a bit of work, it will help you better determine costs and narrow down the right way to approach pricing.
- Figure out the timeframe for your profit tracking, and then calculate the total sales.
- After that, you calculate the goods sold, the gross profit margin, expenses and net profit margin.
Doing this manually is great because it allows you to better understand profit-related metrics. It’s also a seamless way to do it, even if it does come with a few things to keep in mind.
Using plugins for real-time profit calculations
Plugins are usually better because they can help assess your current costs and they can use real-time data, something that can be totally helpful and very effective in the long run. Plugins are seamless, easy to install, and can prove to be super helpful, if you feed them accurate data.
Best practices for monitoring profitability over time
You always want to keep an eye on your profit margin and costs related to creating/selling your products. Additionally, you want to take data-driven decisions for your company. The quicker you do that, the better it will be, and it will certainly provide a more cohesive result than you might expect.
All in all, having a formula tailored to the company’s specifics can help quite a lot, and it can eliminate a lot of potential misunderstandings. With that in mind, you always want to customize the formula, because no two businesses are the same. You will have different costs and all kinds of things to keep in mind. However, once you create a customized profitability formula, it can do wonders for your business!
