Many business owners will ask the same question once revenue starts growing:
“Are we actually profitable?”
You know your sales look strong. Money is moving through the business, and taxes are getting paid. True profitability, though, is a little less obvious. While your business can appear successful on paper in terms of raw revenue, there may be other signs that your financial health is under the weather. Maybe cash flow is tight, margins have been shrinking, or (as tax season comes around) your tax exposure seems to be larger than you’d like.
So, who are you asking the question to? If you don’t have a full internal accounting department, or your usual CPA just retired, a consultation with a small business CPA can be of great service in assessing the financial well-being of your business. A good CPA reviews the numbers behind the business with you to help you interpret them. Under the guidance of a CPA, you can identify where profit is leaking and build a smarter plan moving forward.
Revenue Is Not the Same as Profit
It’s common to conflate high revenue with good business financial performance. However, revenue is only the starting point. Profit is the portion of the revenue that your business earns (i.e. the money you get to keep or reinvest in growing the business) after the full cost of operating is taken out of it (i.e., building overhead, materials, utilities, salaries, benefits, insurance, etc.).
Your “profitability,” then, is a measure of how good you are at generating the maximum possible profits. Or, as CO— by the U.S. Chamber of Commerce puts it, “In short, profit reflects how much you earn, while profitability reveals how efficiently you earn.”
That’s a distinction you have to pay attention to. Many businesses look “busy” on paper while margins, cash flow, and tax exposure quietly drift in the wrong direction. Without careful analysis, it’s actually possible for a company to grow revenue while becoming less profitable.
A small business CPA helps you identify where the gap is coming from and what to change while you still have options. You’ll want to work together with your advisor to get a clear vision into:
- Which products or services actually create margin
- Whether payroll and operating costs are aligned with growth
- If certain tax strategies for business owners are masking performance problems
- Whether owner compensation reflects real results
Owners often discover they are working harder without seeing those desired stronger financial outcomes. But why? The explanation will always come back to the numbers.
How a Small Business CPA Measures Profitability
There isn’t really a single profitability figure you can point to on a report. It’s more of a broad pattern that emerges when you properly organize your financial data and review it with intention. A CPA will typically evaluate performance through several lenses:
1. Margin Analysis
Gross and net margins show how efficiently your business turns revenue into profit. If margins are shrinking over time, the issue might be something you can control or adjust (and thus act on) like pricing, labor costs, or functional inefficiencies in operations.
2. Cash Flow vs. Profit
Many profitable businesses still struggle because cash flow timing does not line up with the timing of major expenses. A CPA can help identify whether your growth is straining your liquidity and where adjustments may be possible to right the ship and keep cash flowing when you need it most.
3. Tax Strategy as a Diagnostic Tool
Business tax planning and profitability go hand in hand. Owners get a clear picture of their earnings — and improve them — when they take time to optimize tax-related factors like compensation structure, entity setup, and expense classification.Sometimes the problem isn’t profitability itself, but how income and expenses are being categorized.
Financial Ratios Tell the Real Story
Diving deeper into metrics? Owners don’t need to become financial analysts, but it can certainly help to understand a few basic ratios. Harvard Business School recommends owners get familiar with the following financial ratios to better understand their company's health:
- Gross profit margin: The percentage of profit the company generates after direct cost of sales expenses have been deducted from the revenue
- Net profit margin: The percentage of profit the company generates after all expenses have been deducted from revenue, including interest and tax from revenue
- Coverage ratio: The company’s ability to meet its financial obligations, specifically to cover its debt and related interest payments
- Current ratio: The company’s ability to meet short-term obligations of less than one year
- Quick ratio: The company’s ability to meet short-term obligations of less than one year using only highly liquid assets
- Debt-to-equity ratio: The percentage of debt versus equity that the company uses to finance itself
- Inventory turnover: How many times per period the entire inventory was sold
- Total asset turnover: How efficiently the company generates revenue from total assets
- Return on equity (ROE): The company’s ability to use equity investments to earn profit
- Return on assets (ROA): The company’s ability to manage and use its assets to earn profit
These measurements may not all be must-tracks on a top-level dashboard, but they’re all things your small business CPA will take a look at with you to help answer whether your company is truly healthy or simply busy.
So, Am I Profitable?
There’s a lot of context that will have to go into it, so a ballpark figure on average or expected profitability could be misleading. However — just for the purpose of illustration — let’s take a look at data from Vena Solutions that shows some average net profit margins by industry:
- Banks (Money Center): 30.89%
- Oil and Gas (Production and Exploration): 28.26%
- Investments and Asset Management: 19.82%
- Computers/Peripherals: 17.47%
- Drugs (Pharmaceutical): 15.20%
- Retail (Grocery and Food): 1.96%
- Real Estate Development: -16.35%
As you can see, there’s a wide range of “average” profit margins. Even within each of those categories, there’s a risk/reward element (which is, in part, how Real Estate Development exists as an industry with that negative average) and business-to-business differences.
A trusted small business CPA brings structure to the conversation so that you can evaluate things fairly for your situation: your current profitability, whether that’s good or bad, what you can do to become more profitable, etc. Once you’ve got the full lay of the land, you can make informed decisions for small business tax planning and the future of your business.