The Basics of Generating Profits and Building a Thriving Business

From the spark of an idea to the first customer, growing a business is an exciting and challenging process. One of the biggest leaps is learning how to generate profit consistently.

Getting business to profitability requires building a long-term strategy that helps keep costs down while growing revenue. It can be beneficial to explore how to optimize business when tracking quarterly profits and opportunities.

How profit works

Revenue, expenses and profit—these financial terms can get confusing when getting a business up and running. For small business owners, it's vital to understand key metrics that can help manage financial progress as the company grows.

Revenue is the overall money the business makes, which is often called the top line because it's the total amount of income that comes into the business before expenses are taken out.

Expenses are the costs associated with running the business. These may include rent, salaries for employees, inventory and business insurance. Money spent hoping to get a return on investment, or ROI, also counts as an expense even if it helps generate sales. Common expenses in this category include websites, social accounts and marketing efforts.

Profit is the money leftover from the top line, minus all business expenses. Generating this surplus, oftentimes referred to as profit margins, is the goal of any for-profit business. In general, the more profit a business generates, the more secure and stable that business is.

How ROI works

ROI is one way to figure out if activities or items the business is spending money on are generating financial benefits. To figure out ROI, divide any financial benefit—extra money earned—by the cost of the investment.

For example, a small local bakery decides to spend $2,000 to create a website that takes online orders. Even though the website is a big up-front expense, it turns out that after the new site was launched, sales increased by 50% the next month. Instead of bringing in $10,000 in revenue, the bakery brought in $15,000 that month.

The equation here would be $5,000—the additional revenue generated from the website—divided by $2,000, the cost of the website.

In this case, the ROI is 2.5. That means, for every $1 spent on the website, the bakery got $2.50 in return the next month. In this case, it's a good investment. In the long run, the additional revenue generated from the website is worth the expense of building it.

When business owners are working on growth, it's important to think about ROI. This metric can be the difference between making a smart money-making investment that pays off down the road or getting into financial trouble.

Steps toward profitability

Beyond understanding the basics, like ROI and how to generate profits from a marketing investment, there are other key steps business owners can take to move toward a healthy margin.

Cut unnecessary costs

Create a business budget and keep track of expenses on a monthly basis. Any expenses that can be cut may help increase profit margins.

From there, calculate costs and maximize cash flow. Some companies can use cash on hand to pay for goods or services upfront, potentially at a discount. Be sure to track time as well—some businesses spend valuable hours on low-value activities that could be automated or delegated to other staff.

Small business owners can also meet with their vendors to negotiate better prices on goods or services. If that doesn't help cut costs, the next step is exploring new options and partnerships.

Strategic spending

Profitability is about more than saving money—it's also about spending smartly. Focus on high-ROI investments. For example, investing in a new website or social media campaign might be a good way to practice reaching ROI goals. When business investments aquire new customers who love the products, the services generate more revenue.

Leverage loans

Small business owners should check eligibility for grants, loans and other programs that can help fund unique products and services. Different types of SBA loans may be used for a wide range of business goals, from startup costs and real estate to furniture, supplies and equipment. These funds help businesses avoid tapping into savings or other important resources.

Evaluate products and services

Devoting attention to current customers can help a business gain a competitive advantage by better meeting their needs. Solicit their feedback through follow-up calls or surveys. They could have some great insights on new or improved products or services the business could offer.

Companies can also conduct a SWOT analysis to determine the potential strengths, weaknesses, opportunities and threats of current or future products and services. Results typically help business owners evaluate the value of investing time and money into a product or service while ensuring business needs are met.

At any stage of a business, crafting a long-term strategy toward profitability is important. Whether a business is close to generating profits or still in its earliest stages, these principles can provide helpful guidance toward a healthier margin.