Why Profitability KPIs Are More Than Just “Making Sales”

A common trap for small business owners is thinking that strong sales automatically mean strong profits. The truth? You can bring in plenty of revenue and still lose money if expenses aren’t managed well.

What Are Financial KPIs?

Financial KPIs are measurable metrics that track how your business is performing in critical areas like profitability, cash flow, efficiency, growth, and customer retention.

Profitability KPIs  help you see past the revenue headline and understand whether your business is actually making money.

The Two Profitability KPIs That Matter Most

1. Net Profit Margin

• What It Is: The percentage of revenue left after covering all expenses — including operating costs, interest, and taxes.

• Formula: Net Profit ÷ Total Revenue × 100

• Why It Matters:

  • Shows how much you keep from every dollar earned.

  • Reveals overall financial efficiency.

  • Flags issues with pricing, expenses, or your business model.

    
    

Example: If you made $100,000 in sales and had $80,000 in total expenses, your net profit margin is: ($20,000 ÷ $100,000) × 100 = 20% That means for every $1 in sales, you keep $0.20 in profit.

2. Gross Profit Margin

• What It Is: The percentage of revenue remaining after deducting the direct costs of producing your goods or services, known as Cost of Goods Sold (COGS).

• Formula: (Revenue – COGS) ÷ Revenue × 100

• Why It Matters:

  • Measures production or service delivery efficiency.

  • Tells you whether your pricing covers direct costs.

  • Shows how much is left to cover operating expenses and generate profit.

    
    

Example: Your landscaping business earned $50,000 this month and spent $20,000 on labor and materials. ($50,000 – $20,000) ÷ $50,000 × 100 = 60% That leaves 60% of your revenue for overhead and profit.

How to Use Profitability KPIs to Grow Your Business

• Track Monthly & Annually – Spot trends before they become problems.

• Compare to Industry Benchmarks – A restaurant’s “healthy” margin will look very different from a SaaS company’s.

• Investigate Dips Quickly – Sudden drops in margin could mean rising costs or underperforming products.

  
  

Action Steps for This Week

1. Calculate Your Net and Gross Profit Margins for the past 3–6 months.

2. Identify Patterns – Are your margins improving, staying flat, or shrinking?

3. Review Pricing & Expenses – If margins are low, you may need to raise prices, renegotiate vendor contracts, or cut unnecessary costs.

   
   

Pro Tip

If you’re offering multiple products or services, calculate gross margin for each category. You might find that one product line is carrying the rest — or draining resources.

Next in the Series

In Part 3: Cash Flow & Efficiency KPIs to Keep Your Business Healthy, we’ll explore how to track the movement of money in and out of your business, avoid the “profitable but broke” trap, and improve resource efficiency.

Want a profitability audit for your business? Wardlaw CPA offers customized financial analysis to help you increase margins and keep more of what you earn. Book your session today and take control of your bottom line.