How to Measure Your Business Profitability

Profitable Business

As emerging designers, many of you are running your fashion business on a shoestring budget and struggling to keep down expenses as much as possible. Knowing how profitable your fashion business is will help you grow and make smarter business decisions.

But, how can you measure your business profitability?

By how much money you’re making, of course!  Well, actually it isn’t all that simple. Let’s imagine you sell 15 dresses this month, ranging in price, some customers may buy three dresses while others buy only one. How can you know what your profit is on an order or how much money is really coming into your pocket? In other words, what’s your profitability?

The answer lies in a simple number called the Average Order Value (AOV). Stick with me, this is really helpful info, promise.

The AOV is just a number that represents the value of an average amount of orders in a chosen period of time.  Now, don’t get intimidated! This number is important for the viability of your business.

If you are not profitable, you can’t stay in business.

Therefore, this number should be important to you and you should be looking at it all the time. If you can calculate the price at which you can sell a dress (factoring in fabric, trim, labels, and labor costs), then calculating your average order value is simple.

And trust us; this is a number buyers, business owners, as well as retailers look into to determine how profitable a business is.

The reason why this is a key calculation in measuring your profitability is because it shows how much money you are making per order. This calculation could be used to increase your income, even when your site traffic may be fluctuating. It can help you determine if customers are spending on more pricey or less pricey items. In addition, it can show you the relationship of transactions costs vs. the transaction itself.

You just need three things (in this article let’s assume you want to calculate your average order value PER MONTH):

  1. Your total sales revenue number for the last 30 days
  2. Number of orders for the last 30 days
  3. A calculator (AKA a gift from the finance gods!) has saved me much time and worrying in these situations as well.

To calculate your AOV you will simply need to take your total sales revenue and divide by your total number of orders. Easy, right?

For example, if you have a total sales of $1200 dollars for the month which was accumulated from 12 orders. You would take your 1200 value and divide that by your 12 order for the month and your AOV is $100.

The END Result:  Your AOV — a number that shows you the exact amount of how much you’re making per order in a monthly period. This is a great tool to budget your expenses, your costs per product, and future investments. And remember, you want to have a high AOV,  the higher your AOV the better.

Now, stay tuned for our next article where we will discuss how AOV can be used to examine and analyze your profitability.

Image via Alexander Rentsch

Francesca LaRaque

Francesca is a recent International Business MBA Graduate from St. Mary’s University College located in London. She is also a graduate from Seton Hall University in New Jersey, with a major in Finance and double minor in Economics and Fine Arts.