How to Know if Your Company is Making Money?

You might be the best in creating the product or providing the services for your company. But to evaluate if you are making money, you need to consider and look at the numbers. We will assess here the three financial statements, namely the income statement, cash flow statement, and balance sheet.

  1. Income Statement. The income statement is the leading financial statement in evaluating the profitability of a business.
  2. Gross Sales. The number of products you sold or the number of hours you render to clients is the source of your revenue.
  3. Cost of Goods Sold. The costs are composed of raw materials, direct labor, and overhead in operating the business. The gross profit computed by subtracting the cost of goods sold from the total sales.
  4. Operating Expenses. Included in operating expenses are the salaries and wages for administrative staff, advertisement and promotion, delivery expenses, supplies, and other costs not directly related to producing the products or rendering the services.
  5. The EBITDA is earnings before interest, tax, depreciation, and amortization.
  6. Net Income. After deducting the interest, tax, depreciation, and amortization, you now have the net income. The net profit margin computed by dividing the net income by the gross sales. The higher the rate, the better it is for your business.

2.Cash Flow Statement. There are three categories for the cash flows, and these are from operating, investing, and financing. It is understandable if you are getting negative figures for the first year as you are still establishing the business. You can put additional investment to cover up the costs. However, the next year onward, the operating cash inflows must already enough to pay for the day-to-day business operation.

  1. Discounted Cash Flow (DCF). DCF computed by discounting the future net cash inflows using the Weighted Average Cost of Capital. If the DCF is higher than the total project cost, it means that the business is a profitable venture.

3.Balance Sheet. The balance sheet assesses the financial position of the business in terms of its assets, liabilities, and equities. The assets equal to debts and equities. Increasing figures imply the viability and stability of a business.

  1. Return on Asset (ROA). ROA is a financial ratio that computes the percentage of the net profit from the total assets. Web/mobile app has a high ROA since it has limited capital assets. However, companies like a car company have a low ROA since it needs substantial capital for the inventory. The higher the ROA, the better, but the business industry-standard of ROA also matters in evaluating profitability.
  2. Liability-to-Asset Ratio. This solvency ratio shows how much of the company’s assets are financed by debt. A low rate is generally a good sign for a business. However, a high ratio can be an indication of decreasing net income and financial distress.
  3. Equity-to-Asset Ratio. This financial ratio shows how much of the company’s assets are from investment and business earnings. A low rate indicates that the business is high leverage. A high ratio is a good indicator of business profitability.

Shown above are some of the considerations in assessing if your company is making money. You can also use available three financial statements in eFinancialmodels to determine your business viability.

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