A sufficient number of products sold on the market covers the costs spent on its production, in other words, its absolute cost. Subsequent sales will be profitable. The amount of profit will depend on the ratio of conditionally fixed costs (according to the results of the analysis) to the changing conditional variables as part of the total cost. When the sold quantity of products reaches the minimum level sufficient to cover the cost, then profit will begin to grow faster than the volume of costs and there will be an opportunity for development and investment.
Constant analysis and certain key performance indicators of the enterprise give a true idea of its profitability or loss-making. If the company reduces its business, then the profit decreases, and the losses increase ahead of the rate of decrease in sales.
Key performance indicators of an enterprise are its performance. You can calculate using the following formula:
Pr = Vpr - Zpr
In this calculation: Pr - profit received from the sale of products.
Forward - revenue received from the sale of products.
Zpr - the amount of costs spent on marketing and production.
According to the calculation indicators, the economic effect that characterizes the business as profitable and exceeding costs will be visible. The indicator of economic effect compares the level of costs and resources spent on its achievement. However, an indicator such as profitability remains outside the scope of this analysis and performance assessment.
Profitability, net profit, cost recovery, economic efficiency - these are the main indicators of the activity of a business. Profitability gives an idea of how quickly the costs will be paid back and the company will make a profit.
Profitability calculation :
- Production: R p = the ratio of profit from sales (sales) / divided by total costs.
- Assets: this is R a = profit ratio (for the reporting period) / total SB. Where Sat is the average balance. The calculation shows how circulating and fixed assets were used, how efficiently and whether they are of interest to financial and credit institutions, to business partners.
- Fixed capital: R ok = retained earnings / divided by MSS. Where MTR is the average cost (of fixed capital).
- Net worth: R ck = net profit / divided by the average cost of fixed assets. This indicator characterizes how much of the profit falls on each ruble invested by the owner. OS - fixed capital.
- Payback: T = capital / net profit. The calculation shows how soon the funds invested in the company will pay off if the conditions of financial and economic activity do not change.
The main indicators of the enterprise’s activity form a “break-even point of business”, which can be reduced to the answer to the question: how many products need to be sold to cover the costs of its production and reimbursement of conditionally variable costs. Based on the analysis, the unit price is set in accordance with all conditionally variable costs in order to fully cover them and get a stable profit.
Indicators, in accordance with market requirements, can be correlated with two groups:
• Evaluation , which characterize the results of a particular activity and the achieved level of development.
• Costs that reflect the costs of implementing types of production and activities.
The division is rather arbitrary and characterizes the relative performance of the enterprise. The type and orientation of the analysis depend on the goals that are set before it. So, production costs can be considered as an assessment of the achieved level of costs, but the level can become the amount when it is planned to produce not units of production, but to provide services. The same can be said about such an indicator as profit, which is not in the first place for the lessor, for him the movement and statistics of the company's liquidity are more important.
Therefore, the assessment of total sales, gross profit and net profit (after taxes and interest on loans and loans have been paid), economic efficiency, capital turnover are the main indicators of the company’s activity that characterize its position for the reporting period.