How Profit Growth is Found in Your Accounting

Are you happy with the profit your company is generating and its growth? Or, are you not exactly sure how to even find how much your profit grew year over year?

Knowing your profit each year is a start, but if you’re serious about growing your business, calculating key indicators such as profit growth is essential. But how do you calculate profit growth? 

In this post, we’ll review types of profit, what profit growth is and how to calculate it so that you can feel confident in your numbers.

What is Profit Growth?

Profit is the remaining revenue after all the expenses have been accounted for. Being profitable is usually the primary goal of any business owner. 

Profit growth showcases the company’s success and growth over time and can be calculated as a percentage change to compare with your past performance or similar companies in its industry.

Keep in mind that there are three types of profit – gross profit, operating profit and net profit- and each tells a slightly different story.

Profit growth is a crucial indicator of financial success since it confirms that you’re earning more money than you spend, but you’re also increasing that amount.

How To Measure Profit Growth 

In simple terms, profit growth is calculated by finding the difference between your current year’s profit and last year’s profit, dividing it by last year’s profit, and showing it as a percentage. This represents the percentage of your profit that grew or decreased from one period to another. 

However, because there are different types of profit, there are also variations in profit growth calculations to consider, which will help determine what impacts your profit growth or decline.

Margin or Profitability Ratio

Gross profit is the company’s revenue minus the cost of goods sold (COGS). It helps companies see how much money they’ve made after accounting for the direct costs associated with creating their product or service. 

Gross Profit = Total Sales – COGS

Gross margin ratio is gross profit divided by sales. Calculating this ratio gives you the percentage of how much profit you are generating after direct costs. 

Operating profit accounts for both COGS and operating expenses. It helps businesses evaluate how direct costs, like labour, and indirect costs, utilities, impact profit. 

Operating Profit = Gross Profit – Operating Costs

Operating profit margin ratio is operating profit divided by sales. Calculating this ratio gives you that percentage of profits you are generating after taking into account your operating expenses but not factoring taxes and interest on loans or other debts. 

Net profit – After accounting for every business expense, including taxes and interest, net profit is the remaining revenue. The bottom line indicates how healthy a business is by showing how much income remains after paying all expenses and costs. 

Net Profit = Operating Profit – (Tax + Interest)

Net profit margin ratio is your net profit divided by sales. Calculating this ratio gives you the percentage of profit generated from your total revenue. 

The varying types of profit are crucial for helping determine what is impacting profit growth. But it is also vital to compare the same type of profit year over year or with other similar companies.

Profit Growth by Segment

If you have multiple revenue streams or divisions in your business, it can be beneficial to segment profit by each revenue stream and, therefore, profit growth as well.

When calculating profit growth by segment, the easiest way is to calculate using gross profit as it is sometimes hard to attribute operating costs to each division (but it can be done!)

This will provide valuable insights into which revenue streams are growing and which may not even be profitable.

Inaccurate Accounting = Inaccurate Profit Growth

All of this means nothing if your accounting isn’t in order. 

If your financial statements are inaccurate, your profit growth calculations will be too. This may mean you miss opportunities or the ability to fix mistakes if you can’t rely on your numbers.

Good accounting gives you a reasonable basis for making good business decisions. And without a good accounting system for recording your revenue and expenses, it’s hard to track them reliably. You will then be unable to understand what impacts your profit growth and how to fix it.

Grow Your Profit With the Help of Shetland Financial

Profit growth is a significant measure of success for any company and reveals how well a company is performing. When you have reliable financial statements, you can take them one step further and gain valuable insights from that information.

This is where Shetland Financial can help. We’ll produce monthly or quarterly financial statements so you know where your money is going and help you understand what to look for.

Contact us today to learn more about finding and measuring your profit growth and how we can help you grow your business.