The formula for profitability is the key to business success

Of all the performance of the enterprise one ofmost important is profitability. It is not surprising, because what can bother a businessman more than the rate of profit they receive? Naturally, in order to calculate this indicator, a formula of profitability is necessary. How to calculate it, we will tell in this article.

The formula for profitability is extremely simple, howeverBefore proceeding to its consideration, it is necessary to define the calculated index. According to economic theory, profitability is an indicator of the economic efficiency of an action, the use of an asset, or the work of an enterprise as a whole. Accordingly, in each case, the profitability formula will be different. You can divide the indicators of economic efficiency into three groups:

1. By types of assets - calculated profitabilityeach of the assets available in the enterprise: fixed assets, financial instruments, personnel, and so on. In this case, the profitability is calculated extremely simply by dividing the net profit by the value of one or another asset.
2. By type of economic activity - estimatedprofitability of performing certain operations. Most often, the estimated profitability of sales, that is, the ratio of profit to revenue. Thus, we see how many kopecks of profit each ruble received from sales brings to us.
3. Enterprise profitability - the formula here is notone, and several: this includes the whole complex of the above indicators, plus the so-called total profitability, calculated as the ratio of net profit to the value of the enterprise (balance sheet currency).

As you can see, nothing complicated in the calculationthere is no profitability - most often it is calculated by simple division. This indicator is widely used both in business planning and in the analysis of the results of the enterprise. In the case of post-factum analysis, we are dealing with an already formed indicator, and when writing a business plan, we only try to guess what our future profit will be. In this case, it is logical to assume that the following factors will affect the profitability:

1. Production costs - as the profitability formula shows, costs are in the denominator, therefore, their increase reduces the target indicator
2. The sale price of the goods - the higher it is, the greaterprofit we get. It should not be forgotten that pricing is also subject to the influence of the laws of supply and demand, which means that we cannot regulate profitability solely by changing the pricing policy.
3. Situation on the market - depending on the type of market(monopolistic, competitive, oligopolistic) will change and the rate of profit. The less competitive the market, the more power the enterprise has, and, accordingly, the greater the profitability indicators it can count on. Increasing competition, on the contrary, may force a firm to reduce profitability. The extreme case is the dumping, in which the company puts so low prices that some time working at a loss, but thus destroys its competitors.

Conclusion:The formula for calculating profitability is simple and straightforward, however, the study of this indicator, and, more importantly, its management is a complex process that requires great attention and scrupulousness. Analysis of profitability over the past period makes it possible to evaluate the efficiency of the enterprise and is the basis for forecasting profitability in the future, and it is this indicator that shows the feasibility of the company’s further implementation of its activities.