How can one tell if a business is working?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

Perhaps the best way to tell whether a business is "working" (whether it is doing well) is by looking at the profit margin of the business.

In order to find the profit margin of a business, you must first subtract total costs from total revenues over some defined period.  You then take that number (which is your profit) and divide it by the total revenues.  This tells you more than you would get simply by looking at total profit.  That is because profit margin tells you how efficient the company is.  It tells you how much profit you are making for every dollar of product that you sell.

Profit margin, then, can tell how efficiently your business is working as well as how much money it is making.  This makes it a good measure of the firm's health.

tripu's profile pic

tripu | College Teacher | (Level 2) eNoter

Posted on

The best way to find whether the business is working or not, is Break even analysis. Break even analysis is a method by which one can calculate whether the business is able to recover its fixed. The organizations cost of product or service is made up of two costs namely fixed cost and variable cost. if a business is able to recover its fixed cost it is said to have break even, that means it has attained a level of operation where there is no profit no loss. The first target of any business to achieve this level. once this is achieved than the business can look forward to getting profits in subsequent periods to come.

Therefore directly looking for profit in very beginning is not the right way to evaluate the business.

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