Are You Sure Your Business Is Profitable? Why Most Companies Don’t Know Their True Profit Margins Published On: 25/05/2025

Are You Sure Your Business Is Profitable? Why Most Companies Don’t Know Their True Profit Margins

 

You might be growing fast. But are you actually profitable?

Yes, there’s a difference, and confusing the two is one of the most expensive mistakes a business can make.

At Prudent CFO, we’ve seen many Indian business owners proudly point to their growing revenue figures as evidence of a profitable enterprise. But behind that growth, the actual story often involves thin margins, misallocated costs, and product lines that silently drain profitability.

Revenue ≠ Profit. And without visibility into unit economics, cost structures, or segment-level profitability, many companies are scaling without a sustainable financial foundation.

And by the time they realise the truth, margins have silently eroded, cash flows have dried up, and strategic decisions are being made in the dark.

In this article, we’ll explore:

  • Why profit calculation in business is often misunderstood
  • How to calculate it the right way
  • And how the best virtual CFO services can uncover the reality behind your numbers before it’s too late.

 

Why Most Founders Misread Profitability

 

In India’s fast-growing business environment, growth is often glorified. Founders proudly announce revenue milestones, assuming profitability will follow.

Consider a D2C brand that recently crossed ₹10 Cr in annual revenue. The founder claimed a solid 30% margin. From the outside, it looked successful.

But when we stepped in as their vCFO, the financials told a different story. Once we factored in logistics, returns, platform fees, and overhead costs, the actual margin dropped to a mere 6%, and shrinking.

Why did this happen? Because the founders had:

  • No visibility into cost layers (freight, warehousing, discounting)
  • No real-time margin tracking by product or channel
  • No systematic approach to profit calculation

In short, they were guessing profitability based on revenue, not measuring it.


How to Calculate Profit in Business the Right Way


At its simplest, profit = revenue − expenses. But in real-world business, the picture is far more nuanced.

Here’s what a proper profit calculation in business should include:

Metric What It Tells You Why It Matters
Gross Profit Revenue – Cost of Goods Sold (COGS) Shows basic product-level profitability
Operating Profit (EBIT) Gross Profit – Operating Expenses Indicates efficiency in business operations
Net Profit Operating Profit – Taxes, Interest, Other Costs Your actual bottom line after all costs

But that’s just the start. True insights come from:

  • Net profit margin by product
  • Contribution margin per channel
  • EBITDA margins by region

And that’s where most businesses fail. They don’t know how to calculate net profit margin accurately or interpret what it’s telling them.

Here’s the formula:

“Net Profit Margin (%) = (Net Profit / Revenue) × 100”

A healthy net profit margin varies by industry, but in most sectors, a margin of 10–15% is considered sustainable. If you’re below 5%, you’re likely leaking money somewhere, and you need help finding out where.

 

Why Most Businesses Think They’re Profitable (But Aren’t)

 

Here are the key reasons we often come across:


1. Incomplete Cost Allocation

A common mistake is failing to allocate all costs to the correct departments, products, or services. Rookie but essential. For example:

  • Salaries of support staff may not be attributed to product costs
  • Overheads like rent, admin, or software are often lumped into general expenses

These hidden costs give a misleading picture of your actual margins.

 

2. Lack of Unit Economics

Many businesses don’t calculate unit-level profitability, which is the cost to sell one unit of their product or service. Without this, they:

  • Don’t know which Stock Keeping Units (SKUs) are profitable
  • Can’t compare margins across products or geographies
  • Struggle to scale effectively

 

3. Lack of Financial Reporting

 

In the absence of dashboards or up-to-date financial systems, business owners rely on outdated MIS reports or year-end P&L statements. This lack of timely visibility means they miss warning signs until it’s too late.

According to a FICCI report, while many SMEs utilise accounting software like Tally, Vyapar, and Busy, a significant portion still relies on manual processes, hindering accurate financial tracking and reporting.

This is why more mid-sized Indian companies are turning to CFO services in India, particularly virtual CFOs, to introduce financial clarity and strategic oversight.

 

How a Virtual CFO Reveals the Truth Behind Your Profit Margins

 

Most business owners make decisions based on top-line numbers, without knowing what’s really driving or dragging down their profits. This is where a virtual CFO (vCFO) steps in, helping you with:

 

1. Real-Time Margin Tracking

 

A VCFO sets up systems and dashboards that show your profit margins in real time by product, customer, region, or channel.

Instead of relying on monthly summaries or year-end P&L reports, you get ongoing visibility into:

  • Which products are actually profitable
  • Where margins are shrinking
  • What’s contributing to cash burn

This gives you the power to take action before profits disappear.

 

2. Cost Analysis and Control

 

Founders often lump salaries, tools, rent, and overheads into “general expenses”, making product-level profits look inflated.

A VCFO changes this by:

  • Allocating shared costs (support staff, SaaS tools, rent) to cost centres or product lines
  • Creating accurate per-unit cost models

This clarity helps teams price more confidently, kill unprofitable SKUs, and stop mistaking cash flow for true profit.

 

3. Unit Economics Modelling

 

If you’re unsure whether your business model is profitable at the unit level, a virtual CFO can help in building unit economics models that offer better visibility in:

  • What it costs to produce and sell one unit
  • What does your contribution margin look like
  • Whether you’re making or losing money with each sale

Why this matters: these metrics reveal whether your growth is sustainable or subsidised by investor capital. The outcome? Smarter decisions on whether to scale, pivot, or pause.

 

4. Pricing and Product Mix Strategy

 

Sometimes your product is solid, but your pricing isn’t. Or you’re selling too much of a low-margin item and too little of a high-margin one.

This is where a VCFO helps to analyse your full product mix and pricing strategy and suggest:

  • Better pricing models
  • Bundling strategies
  • Whether to drop or push certain products

This allows your marketing, sales, and product teams to shift from “what sells more” to “what earns more”. A 2% margin gain often outperforms a 10% sales increase in real value.

 

5. Board-Ready Financial Reporting

 

Good data is not enough; founders need trustworthy, timely, and investor-ready reports while making critical operational decisions. A VCFO brings:

  • Audit-grade monthly MIS reports
  • Standardised formats for investor decks and board packs
  • Business-specific KPIs beyond P&L like cash conversion cycles, EBITDA bridge, or working capital trends

This builds trust across stakeholders and helps you raise capital or exit with confidence.

 

Final Thoughts

 

In today’s competitive landscape, financial ignorance is expensive. Knowing how to calculate net profit margin is now a strategic necessity. The best companies in India are not just scaling—they’re scaling profitably, with visibility into every rupee earned and spent.

At Prudent CFO, we help mid-market Indian businesses track true profitability, optimise margins, and prepare confidently for capital raises or M&A. With us you go beyond guesswork and into growth—sustainably, profitably, and strategically.