Any enterprise in the process of economic activity seeks to profit from its activities. The ideal formula for any business is to get as much income as possible and spend a minimum of resources on it.
What is used for evaluation?
To assess the activities of the company using a variety of economic and financial indicators: cost of production, profitability ratio, sales margins, cash flow, capital flows, and many others. For each such indicator, there is a calculation method, for example, to determine profitability, the profitability formula of the main activity of the enterprise is used.
Profitability of production and enterprise
The term "profitability" itself has German roots and means "profitability". With the help of profitability assessment it is possible to draw conclusions about the effectiveness of the use of cash in the enterprise. But how to calculate the profitability of production?
This indicator determines the profit that the manufacturer received per unit of costs. That is, for example, if the profitability is 20%, then the company received 20 rubles profit for each ruble that was spent on the production process of goods or the provision of services. The lower the profitability, the less the company earns from one conventional unit of output. These theses are confirmed by the profitability formula of the main activity of the enterprise.
Profitability metrics are also called profitability metrics. In fact, it is possible to determine the effectiveness and quality of management in the enterprise by calculating the profitability of the core business of the enterprise. The formula for the calculation is given later in the article. If the resources of the enterprise are not rationally used , then profitability will decrease. And with the effective and economical use of raw materials and other values, it will grow.
The profitability formula of production will help to find out the level of profitability by which one can judge whether it is profitable to engage in such activities or whether it is necessary to re-profile production in a different direction. In other words, with the help of mathematics, one can justify the feasibility or disadvantage of conducting a particular type of activity.
Profitability calculation
The formula for profitability of the main activity of the enterprise, which will show the result in the form of interest, is as follows:
R main = ((Profit from the main activity) / (Cost of production + General production costs + Administrative expenses)) * 100%,
Where:
- Profit from the main activity = (Income of the enterprise by the main type of activity) - (Cost of production + General production costs + Administrative expenses).
- The production cost is the direct costs of doing business (remuneration of labor and payroll for workers who are directly involved in the production process, the costs of the purchase and delivery of raw materials, materials that are spent in production, etc.).
- General production costs - include costs for electricity, utilities, paper, cleaning services, remuneration of personnel who are not directly related to the production process, but are engaged in servicing business processes (secretaries, technicians, cleaners, security guards and others), as well as other costs that cannot be attributed to direct.
- Administrative expenses - expenses for the maintenance of administrative and managerial personnel, holding meetings and meetings, rewarding employees for high achievements, holding sports and other events, trips to various conferences for directors, as well as other expenses incurred by the company to organize the production process.
In order to see the coefficient, the profitability formula of the main activity of the enterprise is calculated without multiplying by 100%.
In principle, this calculation is also suitable for other types of profitability, with only some changes. So, for example, the formula for profitability of production is as follows:
R pr = ((Profit from the sale of goods) / (Cost of production of goods + General production costs for the production of goods + Administrative expenses for the production of goods)) * 100%.
What level of profitability is considered normal?
The first step is to consider the main values of the profitability indicator. The profitability of the main activity, the calculation formula of which is given above, can take on a variety of values. If the coefficient is lower than zero, then this shows that the company spends more money on the production of goods or services than then earns on their sale.
A coefficient of 0 indicates a breakeven point. This means that the company does not receive profit, but also does not bear financial losses from its activities.
If the profitability is above 0, then the company works for its own profit.
It should be borne in mind that in different areas of business there is an acceptable profitability of the main activity, the calculation formula of which speaks about this. There are industries in which it is necessary to cover the risks faced by the manufacturer in certain areas of their activities.
Russia is no exception. In enterprises engaged in different activities, profitability indicators can dramatically differ. However, a company with a lower profitability will not always be less successful. There are a number of reasons for this related to capital turnover and other features of the functioning of enterprises in various sectors of the economy.
Normal profitability in the field of building materials and other production
So, in the manufacturing industries of building materials, as well as those that have high transportation potential to other countries, average profitability indicators are at the following level:
- operation of oil and gas pipelines (80-90%);
- cement production (80-85%);
- fertilizer production (80-85%);
- non-ferrous metal production and processing (60-65%);
- production of metal products (35-40%).
Normal Banking Profitability
In the field of banking services and for financial institutions, the following indicators are observed in the Russian Federation:
- clearing services (65-70%);
- trade servicing in financial markets (55-60%);
- maintenance of registries in the securities market (40-45%).
Normal return on human consumption of goods
The production of goods that are consumed by the population has the following profitability indicators:
- manufacture of tobacco products (40-42%);
- brewing (25-30%);
- household appliance production (20-25%).
Pitfalls of Profitability Index
Despite the fact that the formula for profitability of the main activity of the enterprise is quite simple and understandable, one cannot look straightforwardly at the final indicator.
There are many methods for analyzing profitability, which characterizes a wide range of different types of indicators.
First of all, it is important to evaluate and compare sales volumes of different periods, as well as to track the level of profitability of those periods. It often happens when a good and promising business becomes unprofitable precisely because of an incorrect approach to assessing the necessary volumes of production and sales of goods and services.
For example, the manufacturer of a product wanted to increase the profit of the enterprise not by reducing the level of production costs, but by increasing the volume of products.
The formula for profitability of production at the same time at the output will show that profitability can significantly fall or even be negative. What is the reason for this? There are many factors. There is always the possibility of losing markets or their volumetric insufficiency. Relations with sellers may worsen, or simply the output volume is not needed by the market, since demand is limited. In simple words, if there is no one to sell a product, then why it does not need to be produced. In case of excess production, the goods will simply lie in warehouses and deteriorate.
You should also consider the rate of capital turnover. For the first example, you need to analyze the time between the initial purchase of raw materials and the point at which money was received for the manufactured products. This will be a full production cycle. The profitability of production of 1 product can be, for example, 50%. If there is a long period of product turnover, and also the volume of production is limited, then the real profit may be too small to pay all current expenses. That is, a profitability mark of 50% may not at all indicate the success of the enterprise, but will simply characterize the specifics of the industry and production methods.
How to use the profitability indicator of production?
Of course, the profitability of production is one of the most important indicators by which you can analyze the effectiveness of the enterprise and make any conclusions about the production process itself.
When analyzing the activities of any enterprise, it will not be enough just to know how to calculate the profitability of the main activity, you need to remember other indicators, as well as a variety of methods of economic research. It is impossible to extract profitability from the whole system of indicators into which it is included. This is financial stability, and liquidity, and solvency, etc. In addition, it is necessary to carry out a vertical and horizontal analysis of the balance sheet of the enterprise, to use financial indicators such as capital turnover, asset movement.
Only in this case, it is possible to fully evaluate the profitability indicator, determine the prerequisites of this level and how to effectively increase it.