Net income

All the money that comes in as a result of your business activities is not net profit. Gross profit is the total money you acquire minus only the cost of production of the products/services you sell.

But of course there are more expenses involved in the process. The net profit is what you are left with once you consider the cost of production and all expenses including taxes, commissions and operating expenses.

It is the actual business profit in which revenue exceeds the cost, expenses and taxes necessary to maintain an activity. It provides a measure of business profitability.

In other words:

• Net Profit = Total Revenue - Total Expense.
• And this applies to all businesses no matter their type or size.

Profitability

Obtaining this economic benefit is a primary objective for any business and its strategies will be aimed at achieving it. For this it is not only necessary that money comes in but that the business in general is profitable. Profitability is related to profit but is not the same thing. Profitability is used to measure the efficiency of a business in relation to its size. It is the ratio of the net profit earned to the amount invested. It is mostly expressed as a percentage.

Ultimately it is the measure of our success or failure as it tells us whether we have used money wisely and generated a return on investment with what we have.

Just because a business is making money does not mean it is profitable, but it is a factor that has a direct impact.

Expenses are a fundamental variable in developing any strategy in relation to the profitability of your business. The challenge is to obtain the same profits with fewer resources while maintaining quality.

How to increase profits?

There are several strategies you can follow to increase profits and therefore profitability.

Increase sales: this increases revenue and can have a positive impact on profits, as long as you control costs. Even so, there is no guarantee that profitability will increase, it all depends on whether you are able to keep costs down. If revenue grows but expenses are the same, profits may be little or none.

Increase the price: increasing sales revenue is another way to increase profits. For this strategy to work well and have a positive impact on profits, the product/service must be studied and all possibilities must be taken into account. When you raise a price it will stay that way for a while and if it turns out to be a bad decision you will be trapped and it will be counterproductive. You also have to take into account the right time, when there may be more demand for that product/service, for example.

It is not something you should do all the time, it is risky because your customers may go to the competition. Your price change campaigns should be backed up with a solid marketing strategy.

Another strategy would be to lower prices or make discounts on specific dates to attract a greater number of customers. Also, do not overuse discounts; using them often has a negative impact on profitability.

Reduce expenses: the best strategy, because it depends entirely on you, is to manage and control expenses. It has a big impact on your profits. You must be careful that the quality of your products/services does not diminish because of this.

Types of expenses

There are two types of expenses, fixed and variable:

• Fixed expenses: they do not change with sales, they are always present even if there is no production. They are those that we contract, frequently at the beginning of the business and that we maintain in the long term. They can include rent of establishments, insurance payments, mortgages, obligations with the bank, repairs and maintenance, cleaning, professional services, utilities such as electricity, water, telephone, among others. These are necessary and foreseeable expenses, but we must try to get a good deal from the beginning since it will be difficult to renegotiate them.
• Variable expenses: they change with sales; when sales increase, so do expenses. They depend on production. They may include the purchase of raw materials and products, services assumed by third parties, transportation associated with production, commissions and taxes, discounts on sales, among others.

Undoubtedly, managing expenses is a concern for any business and there is nothing wrong with wanting to control them. When starting your