Formula of profitability of the main activity of the enterprise

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-02 13:48

Any enterprise in the process of economic activity seeks to make a profit from its activities. The ideal formula for any business is to get as much income as possible and spend the least amount of resources on it.

What is used for evaluation?

To evaluate the activity of an enterprise, a variety of economic and financial indicators are used: the cost of products, the profitability ratio of production, sales margins, cash turnover, capital flows, and many others. Each such indicator has its own calculation method, for example, to determine the profitability, the profitability formula for the main activity of the enterprise is used.

Profitability of production and enterprise

The term "profitability" itself has German roots and means "yield". With the help of profitability assessment, it is possible to draw conclusions about the effectiveness of the use of funds in the enterprise. But how to calculate the profitability of production?

This indicator determines the profit,received by the manufacturer per unit of its costs. That is, for example, if the profitability is 20%, then the company received 20 rubles of profit for every ruble that was spent on the process of producing goods or providing services. The lower the profitability, the less the company earns from one conventional unit of production. These theses are confirmed by the formula for the profitability of the main activity of the enterprise.

Profitability ratios are also called profitability ratios. In fact, it is possible to determine the effectiveness and quality of management in an enterprise by calculating the profitability of the main activity 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 efficient and economical use of raw materials and other values, it will grow.

The production profitability formula will help you find out the level of profitability, by which you can judge whether it is profitable to engage in such activities or whether production needs to be redesigned in a different direction. In other words, with the help of mathematics, one can justify the expediency or disadvantage of conducting a particular type of activity.

Calculation of profitability

The formula for the profitability of the main activity of the enterprise, which will show the result as a percentage, is as follows:

R_{main=((Operating profit) / (Cost of production + General production costs + Administrativeexpenses))100%, where:}

• Operating Profit=(Enterprise Operating Income) - (Production Cost + General Production Expenses + Administrative Expenses).
• The cost of production is the direct cost of doing business (wages and payroll for workers who are directly involved in the production process, the cost of purchasing and delivering raw materials, materials that are used in production, etc.).
• General production costs - includes the cost of electricity, utilities, paper, cleaning services, wages 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 costs.
• Administrative expenses - the cost of maintaining administrative and management personnel, holding meetings and conferences, rewarding employees for high achievements, holding sports and other events, travel to various conferences for directors, as well as other costs incurred by the enterprise for organizing production process.

In order to see the coefficient, the formula for the profitability 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, only with some changes. So, for example, the formulaproduction profitability is as follows:

P_{pr.=((Profit from the sale of goods) / (Cost of goods produced + General production costs of goods production + Administrative costs of goods production))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 below zero, then this shows that the company spends more money on the production of goods or services than it earns on their sale.

Coefficient equal to 0 shows the breakeven point. This means that the company does not receive profit, but also does not incur financial losses from its activities.

If the profitability is above 0, then the company works for itself.

It should be taken into account that in different areas of business there is an acceptable profitability of the main activity, the calculation formula of which says this. There is an industry in which it is necessary to cover the risks that the manufacturer faces in certain areas of its activity.

Russia is no exception. In enterprises that are engaged in different activities, profitability indicators can differ dramatically. At the same time, an enterprise with a lower profitability will not always be less successful. There are a number of reasons for this,with capital turnover and other features of the functioning of enterprises in various sectors of the economy.

Profitability in building materials and other manufacturing is normal

Thus, in the construction materials industries, as well as in those that have a high transportation potential to other countries, the average profitability indicators are at the following level:

• operation of oil and gas pipelines (80-90%);
• production of cement products (80-85%);
• fertilizer production (80-85%);
• production and processing of non-ferrous metals (60-65%);
• production of rolled metal products (35-40%).

Normal profitability in banking

In the field of banking services and for financial institutions, the following indicators are observed in the Russian Federation:

• clearing services (65-70%);
• service of trading in financial markets (55-60%);
• maintenance of registers in the securities market (40-45%).

Normal profitability of human consumption goods

Production of goods that are consumed by the population has the following profitability indicators:

• manufacture of tobacco products (40-42%);
• brewing (25-30%);
• production of household appliances (20-25%).

Profitability Pitfalls

Despite the fact that the formula for the profitability of the main activity of the enterprisequite simple and clear, the final indicator cannot be looked at straightforwardly.

There are many methods of profitability analysis, which characterizes a wide range of different types of its 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 the wrong approach to assessing the required volumes of production and sales of goods and services.

For example, a manufacturer of some product wanted to increase the profit of the enterprise not by reducing the level of production costs, but by increasing the volume of output.

The formula for the profitability of production at the same time at the output will show that profitability can fall significantly or even be negative. What is it connected with? There are many factors. There is always the possibility of losing sales markets or their volume insufficiency. Relations with sellers may deteriorate, or the market simply does not need the volume of products produced, since demand is limited. In simple words, if there is no one to sell a product, then why should it not 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 when money was received for the manufactured products. This will be a complete production cycle. The profitability of the production of 1 product can be, for example, 50%. If there is a long period of product turnover, as well as a limited production volume, then the real profit may be too small to pay all current expenses. That is, a mark of profitability 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 efficiency of the enterprise and draw 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 in which it is included. This includes financial stability, liquidity, solvency, etc. In addition, it is necessary to carry out a vertical and horizontal analysis of the company's balance sheet, 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 for such a level and ways to effectively increase it.