Coach Explains 3 Key Determinants of a Business’s Profitability, Most Netizens Find Them ‘Accurate'

Running a business is no joke. While there are over a hundred things at stake, the most basic parameter to judge a business’s success is to find out its profitability. However, there are many misconceptions regarding the calculation of profitability and solopreneurs often end up getting confused. Thus, to help them, business coach and TikTok creator, Nicholas Luo (@coachnicluo) shared simple formulas and calculation methods to figure out three key determinants of success and profitability. In the video which has now amassed over 191,000 views, Luo says if entrepreneurs don’t know how to calculate their profit margins, their business will fail. Luo then goes on to explain how profit margins are calculated. He shares the formula that is selling price-cost price/selling price x 100.

This gives the profit margin percentage that entrepreneurs can use to calculate overall profitability. Sharing an example, Luo says if a product costs $100 and the selling price of it is $150, then its profit margin will be $150-100/$100 x 100, which equals 33.33%. Luo explains that it is the summation of all the expenses that a business makes. These include electricity, supplies, salary, rent, and more. This figure is also needed to calculate the break-even point which determines the profitability of the business. 

To calculate the break-even point, the formula shared by Luo is burn rate/profit margin percentage x 100. He then shares an example where the monthly burn rate of a business was $26,000 and the profit margin was 33.33%. For this business, the break-even point comes out to be $78,000. Luo says that if a business is not making above the break-even point for the given period, it is making a loss. 

Using these calculations, Luo recommends entrepreneurs recalibrate their businesses to reach greater heights. The viewers of Luo’s video resonated with his advice; it seemed like many had tried and tested the formulas already. “Very accurate. I saw those formulas used and flourished 9 stores to 19 stores,” wrote one user, @user2583742121273. 

Meanwhile, some viewers shared their doubts as well which were eventually cleared up by the community. User @mohdamar21 asked, “I don't understand the breaking point part. How is it helpful?” to which another user @falcon_royale replied, “Breaking even** not breaking point. It represents the line between profit and loss.”

Small business owners and solopreneurs can benefit greatly from keeping tabs on their performance. Making sales alone is not enough to ensure a business will make a profit. Thus, break-even analysis can impact an entrepreneur’s business decisions and help them decide their selling prices, cost calculation, budget, and target setting and it can even work as a motivational tool. Another thing that the calculation of the break-even point can help with is determining the margin of safety.

This is the difference between the amount of expected profitability and the break-even point, and it is useful in tracking the future course of sales, as per Ownr. Thus, Luo’s advice and formula are important to understand the basics of accounting.

For more useful information and business tips, follow Nicholas Luo (@coachnicluo) on TikTok.