How to Know If Your Business Is Actually Profitable
You’re bringing in more money than you used to, but does that mean your business is profitable? And why does profitability even matter? You hear it tossed around in conversation, but aren’t sure what it means.
Revenue, cash flow, and profit are three different things, and looking at only one of them can give you a misleading picture of how your business is actually doing. You can have a strong month of sales and still have very little profit left after expenses. You can even be profitable on paper while struggling to cover your upcoming bills.
Understanding your profitability and how to calculate profit gives you a clearer picture of your business's financial health and whether your current decisions support your goals.
Here’s how to look beyond revenue and your bank balance to understand what your numbers are really telling you.
What Does It Mean for a Business to Be Profitable?
A business is profitable when it earns more money than it spends. Profit is what’s left after you subtract your business expenses from revenue.
The basic formula is: Revenue − Expenses = Profit
But profitability is about more than having money left in your bank account. Your revenue tells you how much money your business brought in, while your expenses show what it cost to generate that revenue. Looking at the difference between the two gives you a much clearer picture of whether your business is actually making money.
It’s also helpful to look at your profit margin, which shows how much of your revenue you get to keep as profit.
For example, a business that earns $100,000 in revenue and has $80,000 in expenses has a $20,000 profit and a 20% profit margin. This percentage helps you compare your business's performance over time.
(P.S. If these bookkeeping terms are making your head spin, read this blog for simple definitions!)
Revenue vs. Profit vs. Cash Flow: What's the Difference?
Revenue, profit, and cash flow all tell you something different about your business, but they’re easy to confuse and use interchangeably. Understanding the difference between these three numbers helps you figure out whether your business is profitable.
Revenue
Revenue is the money your business earns from selling its products or services before expenses are taken out. Strong revenue is good, but it doesn't necessarily mean your business is profitable because we haven’t considered expenses yet.
Profit
Profit is what's left after you pay business expenses. There are two types of profit:
Gross Profit: Gross profit is the money your business has left after subtracting the Cost of Goods Sold from revenue. It shows how profitable your products or services are before you consider other operating expenses.
Net Profit: Net profit is what's left after you deduct all business expenses from revenue. It's one of the most important numbers to understand.
Cash Flow
Cash flow refers to the money moving in and out of your business. Positive cash flow means more money is coming in than goes out during a given period. Negative cash flow means you're spending more cash than you're bringing in.
You can technically still be profitable while still experiencing cash-flow problems. At the same time, having money in your bank account doesn't necessarily mean you're profitable.
7 Signs Your Business May Not Be as Profitable as You Think
It’s easy to assume your business is doing well when sales are coming in, but strong revenue doesn’t always mean strong profitability. These signs can help you spot when your business may not be keeping as much of its income as you think.
1. Your Revenue Is Growing, But Your Bank Account Isn't
If your revenue keeps increasing but your bank balance isn’t, take a closer look at where that money is going.
Rising revenue usually comes with rising expenses, and if your costs increase just as quickly, you may not keep much of the additional income as profit. Comparing revenue with expenses can help you determine whether your business is becoming more profitable as it grows.
2. You're Constantly Worried About Paying the Bills
If you never seem to have enough money to comfortably cover upcoming expenses, your business may have a profitability or cash-flow problem. Timing or seasonality can sometimes explain a temporary cash crunch, but consistently struggling to pay bills could mean your revenue isn't high enough to cover your current expenses.
Review your financial statements year over year to figure out whether you're dealing with a temporary cash-flow issue or a larger profitability problem.
3. You Don't Know Your Profit Margin
You know how much money your business brings in, but do you know what percentage of that revenue you keep?
If you don't know your profit margin, you can’t tell how efficiently your business is generating profit or whether your profitability is improving over time.
Tracking this number gives you another way to evaluate your financial performance beyond revenue.
4. You Keep Underpricing Your Services
You can have plenty of clients and steady revenue while still undercharging for what you provide.
If your prices don't account for the time, labor, software, contractors, materials, and overhead required to deliver your products or services, each sale may be contributing less profit than you realize.
Reviewing the costs behind your offers can help you determine whether your pricing supports the profitability you need. If not, it’s time to raise prices or cut expenses.
5. Your Expenses Keep Growing With Your Revenue
Growing expenses aren't necessarily a bad thing. Sometimes spending more helps a business grow, but if your expenses consistently increase at the same rate as your revenue, your business may not be becoming any more profitable.
Look at which expenses are growing and whether they're contributing to additional revenue, efficiency, or growth. Not every expense translates to bringing in more money.
6. You're Paying Yourself Whatever Is Left Over
I know this is an easy trap to get in. If you pay yourself by taking whatever money happens to be left in the business account, it can be hard to understand how much your business is actually earning because there’s nothing left.
Your personal withdrawals and your business's profit aren't the same thing, and how you pay yourself can also depend on your business structure. Keeping those concepts separate in your bookkeeping can give you a much clearer picture of what the business itself is generating.
7. You Don't Have a Clear Picture of Your Numbers
If you have to dig through bank statements, receipts, and spreadsheets every time you want to know whether your business is making money, you may not have the financial visibility you need. Out-of-date or inaccurate books can make it difficult to see trends, understand your expenses, or make informed decisions.
Keeping your bookkeeping current gives you a reliable snapshot of where your business stands instead of forcing you to guess. Many business owners outsource their finances to a bookkeeper to ensure it’s done consistently.
How to Calculate Profit For Your Business
Knowing your profit matters, and learning how to calculate profit is pretty easy. Once you have an accurate picture of your revenue and expenses, you can use a few basic calculations to see how much your business earns and what percentage of revenue you keep as profit.
Step 1: Determine Your Total Revenue
Start by figuring out how much money your business earned during the period you're reviewing.
That could be:
One month: Gives you a snapshot of what your business is doing right now and shows short-term fluctuations.
One quarter: Gives you a broader view of how your business performs across several months. It can help you spot early seasonal trends, but you'll get a clearer picture when you compare the same quarter across multiple years.
One year: Shows you how revenue, expenses, and profit fluctuate throughout an entire business cycle. Looking at monthly numbers across a full year can help you identify recurring busy and slow seasons and plan your cash flow accordingly.
I think it helps to review each of these consistently to understand your business’s seasonality.
Step 2: Add Up Your Business Expenses
Next, review your credit card or bank statements and tally any expenses your business incurred during that same period.
This can include:
Contractor or employee costs
Marketing and advertising
Professional services
Office and operating expenses
Other business costs
Don't overlook other recurring expenses. They can add up and affect your bottom line.
Owner compensation
Taxes and tax obligations
Payment processing fees
Insurance
Loan interest
Profitability can be overstated when you don’t account for the full cost of running your business.
Step 3: Subtract Expenses From Revenue
Now that you have those two numbers, make this simple calculation: revenue − expenses = net profit.
For example, if your business earned $10,000 and had $7,000 in expenses, your profit would be $3,000. This is the dollar amount your business earned after accounting for expenses.
Step 4: Calculate Your Profit Margin
Your profit margin shows how much of your revenue you're keeping as profit. To calculate it, divide your profit by your total revenue and multiply by 100: Profit ÷ Revenue × 100 = Profit Margin
Using the same example, $3,000 profit on $10,000 in revenue gives you a 30% profit margin. Tracking your profit margin over time can show whether your business is becoming more or less profitable, even as revenue changes.
What to Do If Your Business Isn't Profitable
Finding out your business isn't profitable is discouraging, but it also gives you useful information about what needs to change. A closer look at your revenue, expenses, pricing, and most profitable offerings can help you spot where you can improve. If the numbers you just calculated look a little concerning, here’s what to do next.
Look at Where Your Money Is Going
Start by reviewing your expenses and identifying where most of your money goes. Maybe it’s contractors, subscriptions, or office costs. You don’t have to cut every expense, but understanding where your money goes can help you determine which costs actually support your business.
These are examples of expenses that can be a real money drain:
Subscriptions you don’t use (or ones that have increased in cost without you knowing)
Unnecessary or underutilized contractor hours
Excessive processing fees
Marketing spend that doesn’t generate enough revenue to justify the cost
Interest on loans or credit card balances
Revisit Your Pricing
If your prices haven't changed while your costs have increased, your profit margins may be getting squeezed. Look at what it costs you to deliver your products or services, including your time, labor, materials, contractors, and overhead. Even if it’s just you working the business, you have a cost and deserve to be paid for it.
You may find that adjusting your pricing is necessary to make your offerings more profitable. As a general rule of thumb, I recommend revisiting your pricing every year to see if it still makes sense.
Evaluate Your Most Profitable Offers
Not every product, service, or client contributes the same amount of profit. Look at which offerings generate the most revenue relative to the time and resources they require. This can help you see where your business makes money and where you may be spending significant resources for a relatively small return.
If you find that a service makes significantly more or less than your other offers, you can use that information to influence how you market your services.
Here’s a profitability calculator to help!
Improve Your Financial Tracking
Sometimes the problem is the lack of clear financial information. If your books aren't up to date or expenses aren't being categorized correctly, it’s hard to know what's happening. Accurate bookkeeping records give you a more reliable starting point for business decisions.
Create a Plan Before Cutting Costs
Cutting expenses can improve profitability, but cutting the wrong expenses could also make it harder for your business to grow.
Before eliminating a cost, consider what it contributes to your business. An expense that seems unnecessary at first might save you time, attract customers, or help you deliver your services. Look at the bigger picture before deciding what to keep and what to cut.
Don’t forget that several business expenses are tax write-offs, which can help you during tax season, but that isn’t a reason to keep a monthly expense!
How Bookkeeping Helps You Understand Your Profitability
Your bookkeeping gives you the organized financial information you need to understand what's happening inside your business. Instead of piecing together information from bank statements, receipts, and invoices, you have a consistent record of your business activity that can help you evaluate its financial health.
Here’s how it can help:
Separate Business and Personal Finances: This makes it much easier to see what your business is earning and spending. It also gives you cleaner records when you review your financial statements or prepare for tax season.
Accurately Categorize Your Transactions: Properly categorizing income and expenses ensures your financial reports reflect your financial health.
Keep Your Books Current: When your books are months behind, you can’t make accurate business decisions.
Reconcile Your Accounts: Reconciling your business accounts helps confirm that the transactions recorded in your books match your bank and credit card accounts.
Have Reliable Financial Statements: Instead of guessing how your business is doing based on your bank balance alone, you can use organized financial records to understand the bigger financial picture.
Stop Guessing and Start Knowing Your Numbers
Knowing how much money your business brings in is important, but revenue alone doesn't tell you whether your business is profitable. To make informed decisions, you need to look at your expenses, profit margin, cash flow, and the overall cost of running your business.
I hope this profit formula helped, but with accurate, up-to-date bookkeeping and regular financial reviews, you can see the bigger picture. Instead of guessing whether your business is making money, you'll have the numbers to show you exactly where you stand.
Explore my bookkeeping services to get a clearer picture of your business's financial health.
