Profitability is one of the most important measures to understand the financial performance of your business. It is the capacity of your business to earn profits in the normal course of operations.
Profits refer to a situation when the value of your revenues exceeds the expenses. Whereas the term profitability refers to the ability of your business to earn a return on an investment.
Thus, profitability is the real goal of businesses because no business can survive in the long run without profitability.
The question many business owners ask is “Which parts of my business are the most profitable?” In other words, which products or services give the highest return on investment?
Always deliver more than expected…LARRY PAGE
The ways to measure profitability of each product or service you sell depends on the type of business you operate. For example, a trades business may measure the cost of the purchase of the parts and equipment for a particular service and the estimated cost for the number of hours labour to perform a service but then the variability comes in with what other costs are considered as a part of the cost of goods such as motor vehicle and administrative expenses. It may be that one service entails more travel than another or takes more time to manage the delivery of than another.
Delving into what the real costs of delivering a product or service to a customer is will then allow you to determine the gross profit (if there is any). This also means that in the situation where you determine that one product or service has a higher return on investment (lower cost to deliver) than another, you may decide to focus your sales and marketing toward this product over a less profitable one.
Basically, taking the time to determine the profitability of each product and service you deliver will give you the insight you need to make smart business decisions.