Too often revenue gets all the glory. And while it's important and a good starting point for your profit and loss (P&L) statement, if you're not paying close attention to the direct costs, you're not getting a true picture of your business's financial health. Your profits represent the difference between what your business earned and what it spent, and it can be one key indicator of financial health.
Based on research his firm conducted, well known CPA and author Greg Crabtree reported the following findings in his book, "Simple Numbers, Straight Talk, Big Profits,":
- At 5 percent pretax profit, your business is on life support
- At 10 percent pretax profit, the business is doing well, but has untapped potential
- At 15 percent pretax profit, the business is in great shape
- At anything above 15 percent, earn it while you can; it may not last over the long haul
And while profitability is critical, it's important to keep in mind that while your company may be turning a profit, it could be failing to keep money in the bank. Thus, drilling down a little further will give you a clearer picture.