How To Measure True Business Profitability (And Make It Last)

I’ll let you in on a secret that took me years to learn: measuring if your business is truly profitable isn’t just about counting the money in your bank account at month’s end. Real profitability analysis goes much deeper than that surface-level check.

Here’s what I see happen all the time. Business owners get excited because they’re bringing in revenue. Money’s flowing in! But when I dig into their numbers, we discover they’re barely breaking even. Sometimes they’re actually losing money without realizing it.

We’ve worked with thousands of businesses in Seattle and beyond, and I can tell you the patterns are pretty consistent. The organizations that understand true profitability? They’re the ones still standing strong after economic downturns, funding changes, and unexpected challenges.

Let me walk you through exactly how to measure if your business is truly profitable and sustainable.

WHAT BUSINESS PROFITABILITY REALLY MEANS

Let’s clear up the confusion between revenue and profit. I see this mix-up constantly, and it causes real problems.

Revenue is all the money coming into your business. Profit is what’s left after you pay for everything else. Think of it this way:

• Revenue = All money coming in the door
• Expenses = Everything you spend to operate
• Profit = Revenue minus expenses (what you actually keep)

Here’s a real example from one of our clients. Their organization brought in a little over $2 million last year. Impressive, right? But after paying staff, rent, programs, and all other expenses, they kept only $11,000. Their revenue was over two million, but their profit was just $11,000.

That’s barely breaking even, less than a 1% profit margin. This is exactly why outsourced accounting is critical to manage these uncertain times. Without proper financial guidance, they’re one unexpected expense away from operating at a loss. It shows how even successful-looking businesses can struggle without expert financial management to improve their bottom line and build sustainable operations.

For nonprofits, we call this “surplus” instead of profit, but the concept is identical. You need money left over to:

• Build emergency reserves
• Invest in new programs
• Replace aging equipment
• Expand your impact

Without consistent profitability, you’re essentially living paycheck to paycheck. And trust me, that’s no way to run an organization with important work to do.

Key Metrics That Actually Matter

Let’s break down the metrics I use to evaluate business profitability. I’m going to give you the formulas, but more importantly, I’ll explain what each one tells us about your business health.

Gross Profit Margin

This measures how much money remains after covering your direct costs. For a service business, direct costs might include the staff time and materials needed to deliver that service.

Formula: (Revenue – Direct Costs) ÷ Revenue × 100

Example: A job training program receives $100,000 in funding and spends $60,000 on instructor salaries and materials. Their gross profit margin is 40%.

What this tells us: Whether your core activities generate enough money to cover overhead expenses like administration, facilities, and management.

Operating Profit Margin

This shows how much your business makes from its main operations, before taxes and interest.

Formula: (Operating Income) ÷ Revenue × 100

I typically look for operating margins between 5-15% for most organizations. Anything below 3% makes me nervous about sustainability.

Net Profit Margin

This is your bottom line – what percentage of every dollar you actually keep after all expenses.

Formula: Net Income ÷ Revenue × 100

For our nonprofit clients, I generally recommend targeting net margins between 3-10%. Higher margins give you more financial cushion, but donors sometimes question whether you’re being efficient with their contributions.

Return on Assets (ROA)

This measures how efficiently you’re using your assets to generate profit.

Formula: Net Income ÷ Total Assets × 100

If you’ve invested in expensive equipment or facilities, ROA tells you whether those investments are paying off.

READING YOUR FINANCIAL STATEMENTS LIKE A PRO

Your financial statements contain everything you need for profitability analysis. The trick is knowing what to look for and how to spot the red flags.

I start every analysis with three key documents:

• Income Statement – Shows revenue and expenses over time
• Balance Sheet – Snapshot of assets, liabilities, and equity
• Cash Flow Statement – Tracks how money moves through your business

Here’s my step-by-step process for analyzing these statements:

Step 1: Look for Revenue Trends Are certain revenue sources growing while others shrink? Seasonal patterns? Any concerning dependencies on single funding sources?

Step 2: Examine Expense Categories I categorize expenses as fixed (stay the same regardless of activity), variable (change with volume), or semi-variable (mix of both).

Step 3: Calculate Key Ratios Beyond profit margins, I look at efficiency ratios like revenue per employee and administrative cost percentages.

Step 4: Compare to Previous Periods Month-to-month and year-over-year comparisons reveal trends that single-period snapshots miss.

One pattern I see repeatedly: organizations with declining profit margins often have expenses growing faster than revenue. It starts small – maybe 2-3% difference – but compounds quickly if not addressed.

BREAK-EVEN ANALYSIS MADE SIMPLE

Break-even analysis answers one critical question: What’s the minimum revenue you need to cover all expenses?

Here’s how I calculate it:

Break-Even Point = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Let me give you an example. A nonprofit runs job training programs with these costs:

• Fixed costs: $150,000 annually (rent, core staff, insurance)
• Variable cost per participant: $500 (materials, background checks)
• Revenue per participant: $2,000 (program fees)

Break-even calculation: $150,000 ÷ ($2,000 – $500) = 100 participants

They need 100 participants annually just to break even. Participant 101 and beyond contribute directly to surplus.

This analysis helps with:

• Setting realistic program targets
• Pricing decisions
• Evaluating new program ideas
• Understanding capacity limits

TOOLS THAT MAKE ANALYSIS EASIER

You don’t need expensive software to do solid profitability analysis. Here are the tools I recommend:

QuickBooks Online

This handles most small to medium organizations’ needs perfectly. Set up your chart of accounts to match how you want to analyze profitability – separate categories for different programs or revenue streams.

Key features to use:

• Class tracking for different programs
• Custom reports for profit analysis
• Integration with other business tools

Payroll Systems

Since staff costs usually represent 60-80% of most organizations’ expenses, accurate payroll tracking is essential. We work with:

• ADP
• Paychex
• Gusto
• Paycom

All integrate well with accounting software for seamless expense tracking.

Bill.com and Similar Tools

These help track vendor expenses and maintain accurate cash flow projections. You’ll also get valuable data for analyzing spending patterns.

Monthly Reporting Discipline

This might be the most important “tool” of all. Create standardized monthly reports that include:

• Profit margins by program/service
• Cash flow summaries
• Budget variance analysis
• Key performance indicators

I recommend generating these reports within 15-20 days after month-end. Waiting longer makes the information less actionable.

COMMON PITFALLS I SEE ALL THE TIME

After decades of helping organizations with profitability analysis, I’ve seen the same mistakes repeated countless times. Here are the big ones to avoid:

Incomplete Cost Allocation

Many organizations only track direct program costs while ignoring overhead. Your CFO services, accounting, human resources, and executive time all support program delivery too.

Solution: Develop reasonable allocation methods based on actual resource usage, not arbitrary percentages.

Timing Issues

Recording revenue when grants are awarded rather than when work is performed creates false profitability pictures.

Solution: Use accrual accounting principles and match revenue with related expenses in the same period.

Ignoring Indirect Costs

The IRS requires nonprofits to separate program and administrative costs, but for management purposes, you need to understand total program costs including reasonable overhead allocation.

Single-Period Analysis

Looking at just one month or quarter can be misleading due to seasonal variations or one-time events.

Solution: Analyze trends over 12-24 month periods to identify true patterns.

STRATEGIES FOR BETTER PROFITABILITY

Once you understand your current position, here’s how to improve it:

Operational Efficiency Improvements

• Automate routine tasks – Reduce manual data entry and report generation
• Cross-train staff – Increase flexibility and reduce overtime costs
• Eliminate redundancies – Review processes for unnecessary steps
• Invest in training – Well-trained employees work more efficiently

Revenue Diversification

Don’t put all your eggs in one basket. Develop multiple revenue streams:

• Fee-for-service programs
• Individual donor support
• Corporate partnerships
• Government contracts
• Earned revenue opportunities

Regular Financial Reviews

Establish quarterly business reviews that examine:

• Financial performance against targets
• Operational efficiency metrics
• Market conditions and opportunities
• Strategic progress updates

Include board members or advisors for external perspective and expertise.

Technology Investments

Smart technology investments often pay for themselves quickly through improved efficiency:

• Document management systems
• Automated reporting tools
• Customer relationship management (CRM) systems
• Online payment processing

BUILDING LONG-TERM SUSTAINABILITY

Profitability and sustainability go hand in hand, but they’re not the same thing. You can be profitable today while building unsustainable practices for tomorrow.

Sustainability requires:

• Financial Reserves: Most organizations should maintain 3-6 months of operating expenses in reserves. This provides stability during funding transitions or unexpected challenges.
• Diverse Funding Portfolio: Over-dependence on any single funding source creates vulnerability. Aim for no single source representing more than 40-50% of total revenue.
• Strong Governance: Your board should understand financial statements and provide effective oversight. Regular financial training for board members pays dividends.
• Performance Measurement: Track both financial and mission-related metrics to make  sure profitability improvements don’t undermine your core purpose.

MAKING IT ALL WORK TOGETHER

Here’s how I help organizations integrate profitability measurement into their regular operations:

Monthly Process:

• Generate standard financial reports by the 20th
• Review profit margins and cash flow
• Identify any concerning trends
• Take corrective action quickly

Quarterly Reviews:

• Deep-dive analysis of efficiency metrics
• Benchmark against industry standards
• Assess progress toward annual goals
• Adjust strategies as needed

Annual Planning:

• Comprehensive profitability analysis
• Strategic planning incorporating financial goals
• Budget development with realistic targets
• Board review and approval

The key is making this analysis routine rather than occasional. When profitability measurement becomes part of your regular rhythm, you catch problems early and capitalize on opportunities quickly.

YOUR NEXT STEPS

Ready to get serious about measuring your business profitability? Here’s exactly what to do:

1. Start with a baseline assessment using our Bookkeeping Health Self-Diagnostic Scorecard. This tool evaluates your current financial management practices and identifies improvement opportunities.
2. Implement monthly reporting if you don’t already have consistent processes. Even basic profit and loss statements generated monthly will give you valuable insights.
3. Consider professional support for comprehensive analysis and strategic planning. Sometimes an external perspective reveals opportunities and challenges that internal teams miss.

At Greenwood Ohlund, we’ve been helping organizations understand their true financial position for nearly 50 years. We know how to dig into the numbers and translate complex analysis into actionable strategies.

Whether you need comprehensive CFO services or just want to discuss your current situation, we’re here to help. Contact us today.

Because here’s the thing – understanding your profitability isn’t just about the numbers. It’s about building the financial foundation that lets you focus on what really matters: achieving your mission and making the impact you’re meant to make.

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