“We expect all our businesses to have a positive impact on our top and bottom lines. Profitability is very important to us or we wouldn’t be in this business.” – Jeff Bezos.


Profit making is the motivation for starting businesses. Unfortunately, a lot of people motivated by profit making usually fail to make profit in business.


Most businesses don’t make profit because they don’t understand financial basics.

What is a profit?


A profit is the excess of total revenue over total cost at the end of a business period. Total revenue is the money a business earns from the sales of its products and services.

Total cost is the sum of all costs a business incurrs to produce a given level of output

What are the five key areas of cost and revenue that determine business profitability?

UNDERSTAND THE COMPONENTS OF COST AND REVENUE.
A business that desires to make profit must understand the components of revenues and costs and best ways to maximize revenues and minimize costs.
These components are often either overlooked or not known by most entrepreneurs. Before explaining them, it’s important to mention that an entrepreneur must understand the matching concept that ties cost to relevant revenue. This means that no item of cost is assessed in isolation of a corresponding item of revenue.

In carrying out the assessment, available investment opportunities must be exhaustively analyzed to determine the most cost effective that promises the highest revenue yield This would require the understanding of costs and revenues.

Costs are made up of fixed cost and variable cost. A fixed cost otherwise known as a period cost is incurred within certain turnover limits for a business period. It’s unaffected by fluctuations in the levels of turnover. Fixed costs are time related and within limits.

A variable cost is a cost which varies with a measure of activity in the short term. This cost varies with changes in volumes of output. Why is it important to understand variable cost? To determine the amount of additional costs that would be incurred by increasing output by one more unit.

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