How to analyse the profitability of an SME
Growing revenue does not guarantee growing profit. The method to measure your company's real profitability.
Many business owners judge the health of their company by its revenue. It is an important indicator, but it does not say whether the company makes money. Analysing profitability means working down, step by step, from revenue to profit, to understand where value is created — and where it is lost.
Step 1: from revenue to profit
The intermediate management balances break the income statement into successive levels:
| Balance | What it measures |
|---|---|
| Gross margin | Sales − cost of goods or materials consumed |
| Value added | Gross margin − external costs (rent, subcontracting, energy…) |
| EBITDA | Value added − taxes and duties − staff costs |
| Operating profit | EBITDA − depreciation and provisions |
| Net profit | After financial, non-recurring items and tax |
EBITDA is often the most telling indicator for an SME: it measures the ability of the business to generate cash, regardless of investment and financing policy.
Step 2: express each balance as a % of revenue
An EBITDA of MAD 400,000 means little on its own. Relative to MAD 4 million in revenue, it gives an EBITDA margin of 10%. Track these ratios over time: a gross margin that slips two points every year is a warning sign, even if revenue is growing.
Step 3: separate fixed and variable costs
This is the key to understanding how sensitive your business is to activity levels.
Break-even point = Fixed costs ÷ Contribution margin ratio
Example: MAD 600,000 of fixed costs and a contribution margin ratio of 40%. The break-even point is 600,000 ÷ 0.40 = MAD 1,500,000. Below that the company loses money; above it, every additional dirham of sales brings in MAD 0.40 of profit.
Step 4: analyse profitability by product, customer or activity
The overall result can hide large disparities. It is common to discover that a best-selling product is in fact barely profitable once its real costs are allocated (discounts, transport, time spent, after-sales service), or that a major customer absorbs a large share of resources for a thin margin.
To measure this, calculate a cost price per product or service, allocating direct costs and then a share of indirect costs using a relevant key (time spent, floor space, number of orders…).
Step 5: relate profitability to capital employed
An activity can generate a healthy margin but tie up a lot of inventory or receivables. Return on capital employed (operating profit ÷ capital invested in operations) lets you compare activities that do not use the same resources.
Questions to ask yourself
- Do my prices really cover all my costs?
- Which products or customers account for most of my margin?
- What minimum revenue do I need each month?
- Which fixed costs have grown faster than my business?
Answering them with figures rather than intuition profoundly changes the way a company is run.
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