profitability, working capital, inventory status, liquidity ratio, return on investment, etc. All these indicators characterize the financial stability and competitiveness of the supplier’s products. In addition to the above factors that should be taken into account when choosing suppliers, it is also important who to buy products from: manufacturers or distributors. To make this decision
profitability): security ratio negotiable negotiable negotiable funds in settlements (K16); (K17); profitability sales (K18); average monthly output per employee (K19). Usage performance indicators outside working capital and investment activity
profitability): security ratio negotiable means (K14); coefficient negotiable means in production (K15); coefficient negotiable funds in settlements (K16); return on working capital(K17); profitability sales (K18); average monthly output per employee (K 19). Usage performance indicators outside working capital and investment activity of the organization:
profitability. In practice, the following indicators are most often calculated profitability: profitability products, profitability sales, profitability assets, profitability own capital, profitability production assets, profitability investments. Product profitability reflects the relationship between profit from product sales and its cost. She shows
profitability; obtaining excess profits by skimming the cream from the market; crowding out competitors; ensuring survival in market conditions and preventing bankruptcy; introduction of new products to the market; gaining leadership in terms of quality indicators, etc. The choice of pricing policy is based on an assessment of the priorities of the enterprise. Each pricing strategy has a combination of both positive and
profitability manufactured products. In most cases, the analysis of the financial condition of an enterprise is carried out in the following main areas: analysis of liquidity and solvency; financial stability analysis; analysis
profitability. The first group, in particular, may include such indicators as: the ratio of liquid assets to short-term debt. This indicator reflects the real level of solvency of the enterprise, since it is based not only on balance sheet data, but also on analytical materials reflecting the specific situation; ratio of short-term debt to equity
profitable companies at the expense profitable(very dangerous in the presence of domestic traditions of equalization); the impossibility of clearly tracking the redistribution of funds between their companies; the need for a large number of highly qualified managers. Abroad, holding companies can be created either on the basis of a private or joint (joint stock, cooperative), or on the basis
profitability products (not more than 25% of cost); indexation of funds due to inflation; advance payment (up to 40%); preferential taxation, etc. State order for scientific research. The purpose of forming this order is to ensure the acceleration of the development of domestic and foreign scientific, technical and technological achievements. State orders in science are formed in priority areas once
profitability, calculated as the ratio of residual profit to total production costs. So, if the total amount of total production costs amounted to 4.0 million, and net profit - 0.6 million rubles, then profitability will be equal to 15% (0.6: 4.0 X 100). For Western entrepreneurs this profitability would be considered high, for domestic ones - minimal. Obviously, in this case it has
profitability; special - the quality of goods and services sold, their distinctive properties, adaptability to the special tastes and needs of the consumer, payback period for investments, low degree of risk, guarantee of obtaining the planned result. In Section 3, the characteristics of products, goods, services provided by the entrepreneur to the consumer must be recorded: visual
profitability production. Therefore, in conditions of incomplete utilization of the organization’s production capacity, any additional order becomes profitable, even at prices below the full cost, but covering variable costs and, preferably, part of the fixed costs. Only when the price offered is lower than the variable cost per unit of production will the additional order be completed
profitability and what varieties of it do you know? 6. What does innovation and investment activity consist of? 7. What are the main goal and criteria for assessing the effectiveness of innovation and investment
profitability and high security of own capital. For such enterprises - the bank's first-class clients - legal stipulation in the loan agreement for the repayment of loans from incoming revenue seems quite sufficient. In practice, a situation occurs more often when there is a certain risk of timely receipt of revenue. In these cases, there is a need for
profitability) is that they characterize the profit received from each ruble of funds (own or borrowed) invested in the enterprise. A system of performance indicators is used, among them we will focus on the following. Return on assets (property) x 100. Net profit (form No. 2) Average cost of assets (calculation based on balance sheet data) This
profitability; reducing the share of overhead costs and fixed costs, rates of consumption of resources of all types; discontinuation of unprofitable products; analysis by reasons and centers of responsibility; sale or lease of licenses, patents, property of unpromising industries, unfinished construction projects; implementation of long-term financial investments in excess of norms
negotiable And negotiable assets on a certain date: their composition X > and placement. Assets outside negotiable- funds of the organization invested in intangible assets, fixed assets, construction in progress, long-term financial investments, etc., carrying out economic turnover for more than 12 months. Assets negotiable- funds of the organization invested in inventories, accounts receivable
profitability, cost, price, revenue, depreciation, fixed and negotiable means. The control function of enterprise finance contributes to the choice of the most rational mode of production and distribution of the social product and national income in the enterprise and in the national economy. The control function of finance is implemented in the following main areas: control over
profitability. Non-operating income of the enterprise increases by the amount of the initial or residual cost. At the same time, non-operating expenses (losses) increase by the amount of depreciation. Special funds, either net profit or retained earnings of previous years are reduced by the amount of delivery costs. In general, the amount of received fixed assets (less expenses for
profitability(Rock), calculated as the ratio of profit from sales of products (Prp) or other financial result to the value working capital(Juice): Rock = Prp / Juice. This indicator characterizes the amount of profit received for each ruble working capital, and reflects the financial efficiency of the enterprise, since it is working capital ensures the turnover of all
The management of any company is obliged to monitor the performance indicators of the organization of financial and economic activities. The net profit of the enterprise and its stability depend on this. An important stage in assessing the effectiveness of its work is the profitability of working capital. This indicator must be studied by analysts.
Based on the data obtained, measures are developed to improve the financial and economic situation at the enterprise. Working capital is involved in the production of goods. Therefore, without their assessment, the company cannot organize the manufacturing process of its products correctly. The profitability indicator allows analysts and company management to consider the impact of current assets on the profit margin of the reporting period.
The concept of working capital
Working capital of an enterprise consists of resources that are completely consumed in one cycle. They are included in cost. Their turnover period is short-term (does not exceed 12 months). Such assets include raw materials, materials, semi-finished products, fuel, as well as accounts receivable and short-term investments. Their quantity is subject to rationing.
The profitability of working capital will be greater, the fewer resources the company spends to increase profits. However, the number of such assets must be sufficient to ensure continuous production activities.
Therefore, the financial service is working to reduce accounts receivable, work in progress, and inventories in the composition of working capital. To develop the right measures to improve profitability, it is necessary to conduct a comprehensive in-depth analysis.
Profitability concept
Profitability indicators in financial and economic analysis allow us to evaluate the efficiency of using certain resources and their impact on profit. Indeed, in order to obtain a positive financial result in the reporting period, production must be organized in such a way that funds are put into circulation economically.
But, in turn, a lack of resources leads to failures and production downtime. This also has a negative impact on profits. The return on working capital indicator reflects the effectiveness of their use in the manufacturing process. When conducting analysis, this coefficient should be considered in dynamics over several periods. It is also possible to compare it with similar indicators of competing enterprises.
Calculation formula
Return on working capital, the formula of which is used in financial analysis, is quite simple. To understand how to interpret the result obtained during the study, it is necessary to understand the essence of this calculation. The formula for return on working capital is:
- Ros = PE / OS * 100, where PE is net profit, OS is the average annual amount of working capital.
Data for calculation are presented in Form No. 1 and 2 of the financial statements. Working capital is line 1200 of the balance sheet. Net profit is indicated in line 2400 of profit and loss account balance.
If during the analysis it was determined that profitability is greater than 0, then the use of current assets is effective. The company makes a profit through its activities. A negative result indicates improper organization of production. Resources are used inefficiently.
Calculation example
The profitability of working capital, the formula of which was discussed above, is studied in dynamics. The calculation result is presented as a coefficient or percentage. The second option is preferable. To correctly analyze this indicator, the calculation should be considered using an example.
Let's say that in the previous period the average annual value of current assets on the balance sheet was 10 million rubles, and in the reporting year - 12.5 million rubles. At the same time, the company received a net profit of 2.5 million rubles. both in the past and in the current period. Profitability is calculated using the above formula:
- Ros1 = 2.5 / 10 * 100 = 25%.
- Ros2 = 2.5 / 12.5 * 100 = 20%.
In the analyzed period the indicator was positive. But the dynamics indicate a decrease in profitability. The increase in the number of current assets was the reason for this. Therefore, the company's governing bodies should consider the structure of the balance sheet and identify factors constraining development. Measures should be aimed at reducing the number of current assets.
Standard
In addition to considering the dynamics of the indicator, it should be compared with the standard value. It is different for each industry. This is due to the material intensity of production. In industry it is high. After all, the manufacture of new products requires significant expenditures of raw materials, energy, etc. The return on working capital ratio in this case rarely exceeds 0.2.
For new enterprises, a zero value of the indicator is considered acceptable. But for trading companies, depending on the specifics of the activity, it is considered the norm if the coefficient is in the range from 0 to 0.8. In this case, the influence is mainly exerted by the accounts receivable system. at the same time, they are minimal, so they do not have a big impact on profitability.
Asset turnover
Working capital is the company's most liquid resources. Therefore, their number must be sufficient for timely settlements with creditors. But at the same time, movable property should not accumulate and settle in inventories and accounts receivable. Therefore, the speed of one revolution plays an important role.
This is the time during which a certain item or the entire set of current assets goes through all stages of production, turns into monetary form.
This indicator also affects profitability. The faster the turnover occurs, the more profit the company makes. Therefore, the governing bodies are interested in doing everything possible to contribute to the improvement of this indicator.
Profitability and turnover
The profitability of fixed working capital depends on the turnover rate. To understand this relationship, you should consider the formula for calculating this indicator. It looks like this:
- Ros = Рр * Kob, where: Рр - return on sales, Kob - turnover ratio of current assets.
The turnover rate is calculated using the formula:
- Kob = BP / OS, where BP is sales revenue.
Return on sales refers to the ratio of sales revenue to the cost of goods or services. This ratio characterizes the company's activities as a whole.
Break-even calculation
By performing an analysis of the profitability of working capital, a whole set of data is obtained on the organization of the financial and economic activities of the company. Planning is carried out on their basis.
Initially, you need to calculate the break-even level. This is the line that separates the profitability of an enterprise from its unprofitability. At this point, the resources spent on net profit become equal to it. The company receives neither profit nor loss.
When considering financial statements data, it is determined when net profit is received in the amount of 0 rubles. This allows you to plan the minimum required income from sales, at which production will break even. From here the minimum amount of costs is calculated (including
Factors influencing profitability
The return on working capital is influenced by many factors. They can be external and internal. To determine the profitability of working capital in the planning period, company management must take them into account.
It is impossible to influence external factors, but it is possible to foresee their change. These include the cost of raw materials, labor and fuel, seasonal fluctuations in demand and the prices of competitive products. Inflation is also included among the external factors on which profitability depends.
There is a fairly wide list of indicators necessary to calculate the effectiveness of an organization. The main share in this group is occupied by various types of profitability. They are necessary for a more complete and objective analysis of performance results.
What is profitability in simple words
Most often, it reflects how many kopecks of a particular type of profit an organization can receive by investing one ruble in production. And in the case of sales efficiency indicator, profitability shows the share of profit in revenue.
What types, indicators, profitability ratios exist
It is customary to distinguish several groups of indicators - production, sales, capital. In each category, 3-4 values are calculated. It cannot be said that all indicators are equivalent and you can take only one from the group.
In order to evaluate efficiency, it is necessary to use the entire set of types of profitability.
Return on assets
They use profit before tax and reflect how effectively the organization’s fixed assets are used and show how much profit a ruble of fixed and working capital or the total assets of the enterprise will bring:
- fixed assets (ROFA – return on fixed assets);
- working capital (ROFA – return on currency assets);
- assets (ROA – return on assets).
The basic earning power ratio (BEP) characterizes how much a company needs to earn to cover all costs.
Production and sales profitability
They are calculated on the basis of profit from sales and show the effectiveness of the main activities of the organization:
- products (ROM – return on margin) characterizes how much profit from sales can be obtained from one ruble, taken into account in the cost of manufactured products;
- sales (ROS – return on sales) reflects the share of profit from sales in the total income of the enterprise;
- personnel (ROL – return on labor) describes how much profit the company will receive from the operation and employment of employees.
Return on Equity
Net profit is taken as a basis and characterizes the efficiency of using capital for the company’s activities. Also, this subgroup can be calculated during planning and allows you to assess whether it is profitable to invest or borrow:
- equity (ROE – return on equity) reflects the efficiency of using own funds in the activities of the enterprise;
- invested, permanent capital (ROIC – return on invested capital) shows how many kopecks of net profit the organization will receive by investing one ruble in investments;
- borrowed capital (ROBC – return on borrowed capital) describes the feasibility of taking out a loan. If the indicator is higher than the cost of borrowed funds, then it is profitable to take them, if lower, then the organization will suffer losses.
Video - 12 main profitability ratios:
How to calculate profitability
In general, the profitability formula is the ratio of profit to part of the enterprise’s property, revenue or cost:
Profitability = Profit / Indicator whose profitability needs to be found
For example, if the efficiency of fixed capital is needed, then the numerator will be the profit from sales, and the denominator will be the average cost of fixed assets. In the case of, revenue is substituted into the denominator as an indicator of sales.
Return on assets is usually found by book profit, production and sales - by profit from sales, capital - by net profit.
The data for calculation is taken from the balance sheet and income statement.
General formulas for calculating profitability
Assets:
ROFA = BN/C VNA, Where
ROFA – return on non-current assets,
C vna – average cost of non-current assets, rub.;
ROCA = BN/C both, Where
ROCA – return on working capital;
BN – profit before tax, rub.;
C both – average cost of mobile assets, rub.;
ROA = BN / C vna + C both, Where
ROA – return on assets;
BN – profit before tax, rub.;
C vna + C both – average amount of fixed and current assets, rub.
Production and sales:
ROM = PR / TC, Where
ROM – profitability of products;
PR – profit from sales, rub.;
TC – total cost;
ROS = PR / TR, Where
ROS – return on sales;
TR – sales revenue, rub.
ROL = PR / SSCH, Where
ROL – personnel profitability;
PR – profit from core activities, rub.;
SSN – average number of personnel.
Capital:
ROE = PE / SK, Where
ROE – return on equity;
PE – net profit, rub.;
SK – equity capital, rub.;
ROBC = PE/ZK, Where
ROBC – return on debt capital;
ZK – borrowed capital;
ROIC = PE / SK + DO, Where
ROIC – return on invested (fixed) capital;
PE – net profit, rub.;
SK + DO – the sum of equity and long-term debt, rub.
Example of calculation by balance
The company Ekran LLC ended the period with the following financial indicators. It is necessary to display the efficiency of the organization for 2014. The average number of personnel is 25 people. The amount of equity capital is 120,000 rubles.
| Indicator name | Code | As of December 31, 2013 | As of December 31, 2014 | |
| ASSETS | ||||
| I. NON-CURRENT ASSETS | ||||
| Total for Section I | 1100 | 100000 | 150000 | |
| II. CURRENT ASSETS | ||||
| Total for Section II | 1200 | 50000 | 60000 | |
| PASSIVE | ||||
| III. CAPITAL AND RESERVES 6 | ||||
| Retained earnings (uncovered loss) | 1370 | 20000 | 40000 | |
| IV. LONG-TERM LIABILITIES | 1410 | |||
| Borrowed funds | 10000 | 15000 | ||
Calculation of return on assets:
ROFA = 48,000 / (100,000 + 150,000)/2 = 0.384
ROCA = 48,000 / (50,000 + 60,000)/2 = 0.87
ROA = 48,000 / (125,000 + 55,000) = 0.26
Calculation of profitability of production and sales:
ROM = 50,000 / 25,000 = 0.5
ROS = 50,000 / 75,000 = 0.67
ROL = 50,000 / 25 = 2,000
Calculation of return on capital:
ROE = 40,000 / 120,000 = 0.3
ROBC = 40,000 / 15,000 = 2.66
ROIC = 40,000 / 120,000 + 15,000 = 0.296
Conclusions from the calculations in the example:
For existing production, all indicators are at normal levels. It is obvious that it is profitable to use borrowed funds, employees work efficiently, and the amount of working capital is optimal. It is worth paying attention to fixed capital; there is a possibility that it is not fully exploited or there are reasons that reduce the performance of non-current assets.
It is also advisable to analyze the situation with a large amount of equity capital, which reduces the overall efficiency of the enterprise. Given current indicators, it is rational to use and restructure equity capital.
In what cases is its calculation useful?
The indicator is necessary for a qualitative assessment of the efficiency of the enterprise. Absolute indicators such as profit and cost do not provide a true picture of an organization's performance.
They only show the effect of production. Profitability, in turn, allows you to assess how well and fully the company’s property and resources are used. It shows how much money can be obtained from the exploitation of one or another type of own or borrowed funds.
All types of profitability are important for assessing the effectiveness of an organization. Like other relative indicators, they allow not only to analyze the activities of a given enterprise, but also to compare it with competing companies.
Profitability calculated over several years reflects the dynamics of performance and can become the basis for medium- and long-term planning. Particular attention must be paid to the profitability of fixed assets, since they occupy a fairly large share of the organization’s property and are often used inefficiently.
Video about profitability and profitability:
When starting their own business, every entrepreneur hopes to make a profit. But its size in itself does not say anything about the economic efficiency of the enterprise.
An objective picture can be given by such an indicator as the profitability of working capital. After all, without knowing exactly how invested funds work to increase profits, it is impossible to build a truly successful one.
Understanding the terms
As is known, in economic theory it is customary to distinguish three main factors of production:
- Earth;
- work;
- capital.
Since the time of Adam Smith, who laid the foundations of the science of economics, these concepts have undergone a number of transformations, but are still widely used. In particular, capital is currently understood as the totality of property that is used to generate profit.
According to A. Smith, this property can be divided into two groups: fixed and circulating capital. Let's consider what the classic of economic theory had in mind and how much it agrees with modern realities.
Fixed and working capital
Fixed capital is distinguished by the fact that it is used for a long time and is designed for a large number of production cycles. And its cost is included in the cost of finished products not immediately, but in parts (). The most obvious example would be a building or a manufacturing facility.
Other names for working capital would be mobile or working capital. Its difference from the main one is that such funds are spent completely during one cycle and are immediately included in the cost of production. Depending on its expression, working capital can be in the form of:
- raw materials and materials, fuel
- cash;
- short-term financial investments;
In other words, working capital is what products are made from or the cost of these components. After the end of each production cycle, working capital requires restoration. The movement of capital is shown in the classical formula:
Money → Product (Service) → Profit → Money1 → Product (Service)1
Profit
The classic profit formula is as follows:
Profit = Income – Costs.
At the same time, income includes not only revenue from the sale of goods or services, but also interest received, penalties, penalties, etc. Costs will include all costs associated with production, transportation, storage, sales, personnel, etc.
As well as various additional expenses, for example, lost profits, or other expenses.
Profit can be accounting or economic. It is also customary to divide it into gross, that is, the difference between revenue and the cost of production (goods or services), and net, which is what remains of the gross after paying taxes and other mandatory deductions.
Profit means only the positive value of such a difference. Otherwise we are talking about losses.
Important: In fact, making a profit is the goal of any commercial organization. It does not matter whether it produces goods, builds real estate, performs work or provides services. But the mere fact that income received exceeds expenses incurred is not enough to assess the success of a business. You need to know how cost-effective it is to run it.
Profitability
Profitability is another economic term. Its name is translated from German as profitable, useful. That is, when talking about profitability, we mean the economic efficiency of using a particular means of production.
To put it even more simply, this is an indicator of the profit that each ruble invested in the production of goods or services will bring.
There is a simple formula to calculate profitability:
P = Pr/PZ
- P – profitability;
- Pr – profit received;
- PP – incurred production costs.
If as a result we get P>0, then we can say that the costs bring profit, that is, production is profitable. If P<0, то производство явно убыточно. Если результат равен нулю, то можно говорить, как о безубыточности, так и о бесприбыльности предприятия.
Many young companies go through this stage. In the future, either profitability will increase, or the company will operate at a loss and will soon go bankrupt.
However, the profitability ratio is most often used. To calculate it, one more element is added to the formula:
P = Pr/PZ*100%
To assess the performance of a company, different types of profitability are used. This is dictated by the specifics of the activity. For example, for non-profit organizations, profitability may not be an important measure of performance.
But for companies aiming to make a profit, it is very important to accurately calculate exactly what kind of income the invested funds bring.
Types of profitability
You can substitute various indicators into this formula, obtaining, accordingly, different profitability ratios. It is customary to distinguish the following types:
- overall profitability;
- rent sales;
- rent assets;
- rent direct costs.
Depending on the goal, you can also calculate profitability, equity, products, etc.
Calculation of profitability of working capital
The most important thing for assessing the effectiveness of your own business is the profitability of current assets. The reason is simple - these are the funds that ensure a continuous flow of profit. But to do this, you first need to create them by investing money.
The ratio of the profit brought by these investments and the actual expenses will be an indicator of profitability. The higher the value in the result, the more efficiently working capital is used.
Let's substitute the necessary values into our formula:
RO = Prch/O*100%
- RO – the required profitability of working capital;
- Prch – net profit, that is, excluding taxes;
- О – cost of current assets.
The last value is usually taken as an annual average, since the period of use of working capital does not exceed this particular period of time.
Now let's look at a more specific example. Let’s assume that 10 million rubles were invested in production in 2014 and 12.5 in 2015. The profit received for 2014 amounted to 2.5 million rubles after taxes and did not change in 2015. Let's substitute the values into the formula by year, without percentages for now.
2014 P = 2.5/10 = 0.25
2015 P = 2.5/12.5 = 0.2.
In both cases, production is profitable, since P>1, but in absolute numbers it has decreased, that is, for each ruble invested there is less profit, efficiency has fallen. For a business owner, this is a reason to think about the reasons for this phenomenon and increasing profitability.
Important: Don't let the resulting numbers fool you. A profitability level of 0-0.8 is considered normal for trade, and 0-0.2 for industry. If you calculate the coefficient, you get from 0 to 20% or 80%, respectively. The difference in values is also logical: selling a finished product requires lower costs than production.
The calculation of return on assets, depending on their turnover, can be calculated using the following formula:
The turnover ratio is calculated using the following formula:
Other types of profitability
Overall profitability usually refers to the profitability of a company's core activities. The peculiarity of calculating this indicator is that the time elapsed between the investment of funds and receipt of proceeds from the sale is not taken into account. The values in the formula will look like this:
P = Revenue / Cost (of goods or services + management + commercial activities).
Return on sales allows you to estimate the share of net profit in total revenue. Here, too, comparisons of different values are possible. For example, the numerator may contain both gross and net profit, or profit calculated without taking into account taxes and other deductions.
In the latter case, we are talking about operating profitability. The denominator will always be the amount of revenue.
Direct cost return is somewhat similar to asset efficiency. But the denominator of the formula will include the so-called decapitalized expenses, that is, written off from the asset.
The result is only a value showing the return on investment. But how effectively they were spent will be shown by the return on assets ratio: fixed and current.
Sometimes the return on fixed assets is also calculated. To do this, the denominator of the formula is substituted, accordingly, for the cost of fixed assets rather than current assets.
That is, the result is an idea of what part of the net profit falls on each unit of their value.
The Importance of Profitability Assessment
Why is it so important to evaluate the return on working capital? To do this, we again recall the classic formula:
Money → Product (Service) → Profit (money)
Before selling the final product and calculating the revenue received, only one value is known in the formula - the amount of invested funds. Everything else can only be guessed at. In particular, based on the profitability ratio obtained based on the results of past periods.
It is necessary to consider profitability indicators in dynamics. This will allow you to see exactly how the efficiency of the enterprise changes depending on the decrease or increase in working capital invested in production.
But to obtain a more accurate forecast, it is necessary not only to determine the indicators, but also to correlate them with the economic situation as a whole, that is, a large-scale multifactor analysis.
Important: It may be relevant to compare your own profitability with the same ratio at similar enterprises. This will allow you to identify mistakes, or, conversely, the advantages of your business. The result of the profitability analysis should be management decisions aimed at increasing it or at least determining the profitability threshold.
Profitability threshold
This indicator is also called the break-even point. The threshold value will be a profit margin of 0. This means that the revenue received fully covers all expenses incurred.
In the future, the situation may swing both towards increasing profitability, that is, the appearance of positive profits, and towards the appearance of losses.
Calculating this indicator is necessary in order to understand exactly what volume of sales is necessary to prevent losses from occurring. Increasing this value will improve profitability in most cases. The threshold can be calculated both in monetary terms and in units of production.
The formula in these cases will be slightly different:
PR = Vo*Z1 / (Bo-Z2) in case of counting in money, and PR = Z1/(Ved-Z2) when counting in quantitative terms.
In these formulas:
- PR – profitability threshold;
- Firstly, total revenue received from the sale of all products;
- Ved – revenue received per unit of production (price);
- Z1 – fixed costs;
- Z2 – variable costs.
The division of costs into fixed and variable is associated with their ability to grow or remain unchanged with an increase in the volume of production of goods or their sales. Constants include some taxes (for example, on property), rent, management salaries, and depreciation payments.
Variables include the costs of raw materials, electricity, components, wages, etc.
What does profitability depend on?
The final amount of profit is influenced by two groups of factors: external and internal. The first includes current market conditions:
- cost of raw materials and fuel;
- wage level (labor price);
- market price of the product (goods, services);
- seasonal fluctuations in demand;
- inflation and
All these reasons affecting the cost of production, and, consequently, the profitability of its production, practically do not depend on the manufacturer.
And he cannot directly influence them. Although, there is still an opportunity to increase demand, and, consequently, increase profitability. For example, due to a successful advertising campaign.
Internal factors are a completely different matter. These include:
- labor productivity;
- method of organizing production;
- management structure, etc.
Changing them is, in fact, the internal policy of the company. Which is formed, among other things, on the basis of an analysis of profitability indicators in different periods.
Changing conditions so that profits increase and costs decrease is the main way to increase profitability, which logically follows from its formula. The larger the number in the numerator or the smaller the denominator, the higher the result obtained. Let's look at how we can achieve this.
Ways to increase profitability
There are three main ways to increase profitability:
- acceleration of trade turnover;
- cost reduction;
- increasing prices for their products.
We increase the speed of trade turnover
In economics, circulation time is characterized by the length of time that manufactured products remain in inventory. The number of updates of these stocks will be the value of the turnover rate.
It is worth remembering that we are not talking about the turnover of the products themselves, that is, goods or services, but exclusively of the funds invested in them, that is, the number of cycles Money → Product (Service) → Money.
Increasing the speed of turnover of goods or services, that is, the volume of their sales for a certain period, allows you to increase the profit received during the same period. And also reduce the cost of storing goods in warehouses. In fact, accelerating trade turnover means increasing demand for a product or service.
This can be achieved in different ways, depending on the profile of the company. The sphere of trade demonstrates them most clearly. Here profitability directly depends on sales volume. But other industries can learn from useful experience and increase their own profitability.
Ways to increase the speed of turnover (stimulate demand) include:
- offering those goods and services for which the demand is really high;
- taking into account seasonality of demand;
- expansion of the range;
- reduction of inventory;
- targeting consumers with different income levels;
- work with staff aimed at improving the quality of service;
- competent advertising campaign;
- improvement of the technical equipment of the enterprise.
We reduce costs
Costs are a necessary part of any production. But you need to clearly understand how much profit each ruble spent can bring. And how can you increase the return on costs. To do this, the leader will need to follow three basic principles: planning, discipline and control.
Planning of all expenses should be carried out in the form of a system of plans: short-term and long-term. This will allow you to evaluate the prospects and cost-effectiveness from different points of view.
It happens that expenses that are ineffective in the short term ultimately bring greater profits in the long term. And then the plan must be strictly implemented and overspending can only be caused by extraordinary circumstances, and not by considerations of short-term gain.
Actually, cost reduction occurs in three stages:
- calculation and classification of expenses into necessary and excess;
- determining the prospects for eliminating excess expenses;
- development and implementation of an action plan to reduce costs.
As for specific methods, we can name such as:
- outsourcing of non-core but costly processes (computer maintenance, cleaning, accounting, legal support, etc.);
- increasing labor productivity by improving technology;
- optimization of the remuneration system;
- reduction of household expenses;
- reduction in advertising costs.
The result of cost reduction will be a reduction in production costs.
Important: the same effect can be achieved by expanding production volume. One of the features of costs is their decrease per unit of output as the number of units increases. That is, the production of 100 units will be cheaper in absolute terms than the production of 1000. But in terms of per unit, the ratio will be different.
We raise the price
This profitability tool should be used with great caution. Firstly, because without a simultaneous reduction in cost, it may turn out to be ineffective.
Secondly, increasing the selling price may discourage consumers. Although this “old-fashioned” method is widely used, the effect of its use can be not just low, but zero or even negative.
In what cases is a price increase justified and will actually increase the profitability of the company:
- The product or service is unique and has no cheaper analogues. In other words, we are talking about a monopoly. This is confirmed by the constant increase in tariffs for housing and communal services. But for the most part, there are very few such goods and services on the market.
- An increase in price is achieved by increasing quality. Not all companies can afford this. The most typical example will be manufacturers of modern complex equipment. Although the price also includes additional costs - for scientific development.
- People are willing to pay any money for a brand. A typical example is Apple technology. The high price is the result of a carefully thought-out information and advertising campaign. But it would not have worked if other factors were not involved in pricing, primarily high quality products.
Indicators of efficiency of use of working capital
The founders and shareholders of any enterprise are extremely interested in the development of their business and periodically analyze the financial condition of the company. The most telling indicator about the actual state of affairs in terms of finance is such an indicator as the profitability of the enterprise. This is a criterion for the degree of production efficiency, indicating the amount of profit that covers the invested funds. The main information for carrying out profitability analysis is balance sheet data, and the tools are various calculated values. Let's talk about this indicator, find out how to calculate it and how to analyze the calculation results.
Profitability of the enterprise
So, let's start with a general definition of this concept. Profitability is calculated to see the share of profit in the volume of income received in order to present an overall picture of how the company performed during the reporting period. This indicator fully characterizes the profitability (or profitability) of the company. Calculations are carried out in absolute (rubles) and relative (percentages and coefficients) terms. Profitability is a calculated value and is defined as the ratio of profit to various groups of assets and sources, for example, to the cost of property or investments made in production.
Enterprise profitability analysis
Analytical work is based on comparing the values obtained for the reporting period with planned values or performance indicators for previous reporting years. In general, the profitability of an enterprise is a set of values indicating the level of profitability in different industries, industries, workshops or from products sold. Let's take a closer look at these calculation tools.
Return on assets
One of the most important indicators, without which it is impossible to get the full picture, is the return on assets, i.e., the company’s property. It represents the ratio of the share of profit remaining with the enterprise to the average amount of assets and is determined by the formula:
R a = P h /A * 100,
where P h is net profit, A is the value of assets.
The calculation shows the percentage of profit received from each ruble spent and the profitability of the enterprise, determines the level of profitability of the company in the period under review. You can see the calculation algorithm more clearly in the proposed table.
| Indicators | Planned task | Actual Execution | Deviation from the plan in thousand rubles. | Deviation from plan in % |
| 1. Net profit in thousand rubles. | 2854 | 3659 | 805 | 28,21 |
Average asset value, including: | ||||
| 2. Fixed assets | 20154 | 22478 | 2324 | 11,53 |
| 3. Intangible assets | 120 | 190 | 70 | 58,33 |
| 4. Working capital | 7452 | 8562 | 1110 | 14,9 |
| 5. Total value of assets (sum of lines 2, 3, 4) | 30580 | 34889 | 4309 | 14,09 |
| 6. Profitability level (line 1/line 5*100) | 9,33 | 10,49 | 1,15 |
Let's analyze the obtained values. The actual level of profitability exceeded the planned target by 1.15%.
The following factors influenced its growth:
- exceeding the plan for net profit by 805 thousand rubles, or 28.2%, and its above-plan increase increased the level of profitability by 2.33% (805/34889 * 100);
- an increase in asset value by 14.1% resulted in a decrease in profitability by 1.18% (1.15-2.33=-1.18%). In other words, if the increase in the value of assets had not occurred, then the growth rate of profitability would have been not 1.15%, but 2.33%, and the resulting increase in profitability of 1.15% was achieved solely due to an increase in net profit.
An analysis of the profit and profitability of an enterprise will require a detailed consideration of the influence of such factors as the dynamics of fixed and working capital.
Fixed assets
The formation of profit and profitability of an enterprise is influenced by such indicators as the profitability of fixed assets. The calculation formula is:
R os = P h / S os * 100,
where C os is the average cost of fixed assets.
In our example, it was 16.28% (3659/22478*100).
Return on working capital
The value of this indicator is determined by the formula:
R rev = P h / S rev * 100,
Substituting the values from the presented example into the formula, we obtain an increase in the level of profitability of working capital by 42.73% (3659/8562*100).
Return on Capital Investment
The return on investment in production determines the efficiency of their use and is calculated using the formula:
R vk = P v / I b - 5th section of the balance sheet,
where P in is gross profit, And b is the total balance sheet value.
Equity
An analysis of the profitability of an enterprise will not be complete without determining the profitability of equity capital, which determines the share of income from the capital invested by the participants:
R sk = P h /V sk *100%,
where V sk is the amount of capital (result of section 3 on the balance sheet).
A comparison of the values of return on assets and equity allows the economist to analyze the extent to which the company uses borrowed funds and the feasibility of this.
Product profitability
The profitability of an enterprise is a changing value, the fluctuations of which are influenced by a very significant indicator of product profitability, calculated as follows:
R pr = P h /ST rp *100%,
where ST rp is the cost of sales.
If the numerator uses the value of profit from products sold, then the economist will be able to analyze the amount of income received from the ruble invested in the production and sale of goods. This value can be calculated both for the enterprise as a whole and for structural divisions or manufactured goods.
Sometimes the profitability indicator is calculated as the ratio of net profit and revenue. It is influenced by changes in the cost and structure of goods sold, market fluctuations that dictate prices for manufactured products.
Analyzing sales
Another indicator that affects the profitability of an enterprise is return on sales, defined as follows:
P r = P r /V*100,
where P r - profit from sales, V - volume of revenue.
This value is found to determine the share of profit in the volume of realized revenue, therefore its second name is the rate of profitability.
A decrease in the indicator indicates a drop in demand for the product produced, and, accordingly, a decrease in its market competitiveness.
The profitability of sales depends on fluctuations in price and cost of goods. An increase in the rate of profitability is achieved:
An increase in the price of goods sold;
Falling costs;
Increasing the share of the most competitive and profitable product groups.
The calculation of the enterprise's profitability will allow management to develop measures to increase sales profitability taking into account market changes, revise the structure of product groups, implementing a competent assortment policy, identify reserves and control production costs by cost elements.