By Babajide Komolafe

Another major factor to consider when starting a business is the profit the business can generate and the income you can earn from the money you invest in it—especially when compared to what you could earn from an alternative investment or business.

In other words, you need to be sure that the income from the business will be worth the energy, time, and resources invested in it.
To know how profitable a business is or can be, you must consider what is called the profit margin, which shows how much profit you make for every ₦1 of revenue or sales.

The profit margin is calculated by dividing profit by revenue, and then multiplying the result by 100. For example, if you start a business with ₦100,000 and, in the first year, you generate revenue of ₦20,000 and spend ₦15,000 to earn that revenue, your profit is ₦5,000.

To calculate the profit margin, divide ₦5,000 (profit) by ₦20,000 (revenue). The result, 0.25, when multiplied by 100, gives 25%. This means your profit margin is 25%. In other words, for every ₦1 of revenue or sales, your profit is 25 kobo; or for every ₦100 of revenue, your profit is ₦25.

However, since you invested ₦100,000 and earned a ₦5,000 profit, the income on your investment—known as Return on Investment (ROI)—is 5%.

When these two factors are considered, it becomes clear that many people in Nigeria run businesses that are not worth the effort. From my observations and personal interactions, I have seen people who invested heavily in businesses with very low profit margins—sometimes as low as 5%—and with an ROI of only 1%.

As a result, they struggle for years, and eventually, the business collapses.
Some people engaged in such low-performing businesses even borrow money or seek financial support to sustain their operations. In the end, they often end up in debt and misery when the business finally fails.

There are many reasons why a business may perform poorly or generate low profit margins. One possible reason is low demand for the product or service, especially if the business offers something already widely available in the market.

Another reason could be that the product or service is not properly priced to cover the cost of production or service delivery.

A major cause of this, in turn, is the failure to properly identify all the costs incurred in rendering the service or producing the goods.