Basic Profitability Formula

Basic Profitability Formula

How to Calculate Basic Profitability

Profitability measures how much profit a business makes compared to its revenue. The basic formula is:

Profitability = (Revenue - Costs) / Revenue

Steps to Calculate:

  1. Determine Total Revenue: The total amount earned from sales.
  2. Calculate Total Costs: Includes all expenses (e.g., production, labor, rent).
  3. Subtract Costs from Revenue: This gives your net profit.
  4. Apply the Formula: Divide the net profit by revenue and convert to a percentage.

Example:

Revenue: $10,000

Costs: $7,000

Profit: $10,000 - $7,000 = $3,000

Profitability: $3,000 / $10,000 = 0.30 → 30%

This means the business retains 30% of its revenue as profit.