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How to Conduct a Business Profitability Analysis

  • Writer: Brian R. Schobel, CPA
    Brian R. Schobel, CPA
  • Apr 30
  • 2 min read



Knowing your revenue is great — but understanding your profitability is what truly defines the health of your business. Whether you're growing or just trying to stay afloat, conducting a profitability analysis helps you identify what’s working, what’s draining your resources, and how to course-correct strategically.


Step 1: Understand the Basics

Profitability analysis isn’t just about “Are we making money?” It’s about digging deeper into how and where your business earns its profits. There are three key profitability metrics to track:


  • Gross Profit Margin – How much is left after subtracting the cost of goods sold (COGS).

  • Operating Profit Margin – Profit from core operations (excluding taxes and interest).

  • Net Profit Margin – What actually lands in your pocket after all expenses.


Step 2: Analyze Income vs. Expenses

Start with your Profit & Loss statement. Break it down by:

  • Revenue Streams (e.g., product lines, services, locations)

  • Direct Costs (materials, labor)

  • Indirect Costs (rent, software, admin)

Are any products or services consistently unprofitable? Are your fixed costs growing faster than your sales?


Step 3: Review Pricing and Cost Structure

Profitability can often be improved by:

  • Raising prices strategically

  • Negotiating better supplier terms

  • Trimming operational inefficiencies

  • Automating routine tasks

Step 4: Compare Period Over Period


Use monthly, quarterly, and year-over-year comparisons to identify trends. Spikes in expenses? Flatlining revenue? These are the signs you need to address.


Step 5: Set Benchmarks and Goals


Compare your margins to industry averages. Are you underperforming? Why? Set measurable targets to increase margins by improving sales efficiency or reducing overhead.


Conclusion

Profitability is more than revenue — it's about smart financial management. A regular analysis helps ensure you’re not just working in your business, but working on its long-term success. If you need help digging into your numbers, consider partnering with a trusted accountant or CFO advisor to guide you through a deep dive. LinkedIn: https://www.linkedin.com/company/brs-cpa-at-bookkeepingbrian-com


 
 
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