As a business owner, your main goal is to make a profit. At the end of the month or year, you want the money that comes in to be more than what you put into the service or product and the business in general. At its simplest form, profit is income-costs.
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Many entrepreneurs struggle with calculating profit because they confuse it with sales. Having a lot of money in the bank does not mean your business is making a profit. Your bank might not increase your credit line because of this. Your company might also not attract investment because of this.
You probably record all the money that comes in on a spreadsheet of some kind, good but you need a comprehensive accounting software/system in place.
Your accounting software helps you take down income and your business seems to be making a profit because a lot is being recorded as income, this is incomplete. You should take costs and expenses into consideration before you come to this conclusion.
There are two types of accounting systems. The first is the accrual-based accounting where you add the money you get as soon as it is in view like when a deal or contract has been signed. The second is the cash-based accounting which is where you record when the money is actually in your account. If you own a small business, you are better suited to the cash-based system. You should input this into your accounting software/system as soon as you get it to help you keep track on a regular basis.
Furthermore, you should record your business costs and your income simultaneously. Your business costs are those things you spend money on to keep your business going. They could range from your rent to the cost of production of your product. This will help you calculate your profit margin better. Consequently, as you record your income for a particular month you should record your costs right beside it.
The bottom line (profit margin)
This is how you know whether you are making a profit, loss or just breaking even. You should subtract all your business costs from your income after every month. If you come up with a positive number then you are making a profit. But if your calculations give you a negative number then you are making a loss, hence breaking even means your income and costs balance each other out. If you find out you are making a loss then you probably need to make some changes regarding your costs. You don’t really have control over your fixed costs like rent but you could change your model with your variable costs like cost of production, certain utilities or you could adjust your pricing.