What is the profitability of the enterprise in simple words and how to calculate it?

What is the profitability of the enterprise in simple words?

The economic toolkit of a modern business person is replete with various indicators. All of them serve as an information base for the development of tactics and strategies of behavior in the economic environment. An experienced top manager can get an idea of ​​the general condition of any firm by analyzing several key ratios, one of which is the profitability of the enterprise. So, how to calculate the profitability of the enterprise?

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Profitability of the enterprise is an indicator that shows how much added value can be obtained from each monetary unit invested in the firm.

In simple words, if we ignore the particulars, it turns out that if the businessman's revenue is 1000 rubles, and the expenses are 500 rubles, and the profit, respectively, is 500 rubles. (1000 rubles minus 500 rubles), then the profitability of the firm of such an enterprise is 100%. (500 divided by 500, and all this is multiplied by 100%).

You can find out what the average number of employees is and see a sample report on this indicator.

Formula and examples of calculating profitability

In a simplified form, the formula for calculating the profitability of an enterprise looks like this:

• P - profit
• Z - all the costs of creating a product.

For a clearer understanding of the calculation formula, it is proposed to consider a few simple examples.

Let the Bookinist company earn 100,000 rubles from the sale of its products. All company costs (resources, equipment, labor (including management personnel) and infrastructure) amounted to 80,000 rubles.

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Profit is equal to the difference between revenue and costs: 100,000 rubles. minus 80,000 rubles. equal to 20,000 rubles. The calculation of the profitability of the company "Bookinist" according to the above formula will look like:

20,000 rubles/80,000 rubles*100%=25%

Thus, the profitability of the Bookinist company is 25%

The last example: let the company "Sputnik" for a certain period received an income in the amount of 600,000 rubles. The cost of producing goods in the same period amounted to 200,000 rubles. Then the profit (the difference obtained after subtracting expenses from revenue) will be equal to:

600 000 rubles minus 200,000 rubles. = 400,000 rubles

So there is:

• Profit - 400,000 rubles.
• Costs - 200,000 rubles.

The calculation of the profitability of the Sputnik company will look like this:

400,000 rubles/200,000 rubles*100%=200%

In this case, the profit is equal to two hundred percent.

In reality, there can be many options for costing. If the company was opened quite recently (less than a year), then it simply does not make sense to calculate the profitability of the enterprise, since the turnover of the initially advanced capital takes a period of several years.

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Where and when is this indicator applied?

• When managing a company. Knowing the values ​​​​of the profitability indicator of the enterprise for a certain period of time, the manager can determine by analyzing the components of his formula (profit and expenses) where there are problems.
• Forecasting possible profit. Having information about the average profitability of the enterprise, the manager can predict with sufficient accuracy how much profit he will receive.
• Justification of investment projects. Such a summary indicator as the profitability of the enterprise is the most powerful argument for potential investors: having an idea of ​​the estimated amount of investment and the average profitability of the enterprise, the investor can easily calculate for himself the future benefits from the investment project.
• If the enterprise is the subject of trade. The fact is that the profitability of the enterprise, along with liquidity, is one of the most important categories that affects the value of the company.

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What factors affect the profitability of a business?

The reasons for the change in the indicator under consideration can be divided into endogenous and exogenous. Exogenous include:

• Geographic location. The localization of production has a strong effect on the price level, and hence profits.
• The level of competition. Competition affects the price, hence the rate of profit.
• Market conditions. It determines the price at which the product will be sold.
• Quantitative parameters of such categories as money market and asset market. The ruble received at one state interest rate, and the same ruble at another - differ in purchasing power.
• State tax policy. Taxes directly affect how much profit an entrepreneur will receive.
• Political situation. For example, the latest sanctions applied to Russia have a negative impact on the profitability of Russian companies.

Endogenous factors are divided into production and non-production.

To endogenous non-productive factors relate:

• Efficiency of supply chains and marketing. This affects the costs of the entrepreneur.
• The need for measures that eliminate or compensate for the effects of production activity harmful to nature. If the law obliges to take actions to eliminate the negative consequences of the production process, this is included in the costs.
• Presence of conditions for normal work activity. When an employee is provided with the necessary infrastructure for normal work, labor productivity increases, which reduces the cost of manufacturing goods.
• financial policy. Financial activity is multifaceted, it implies both efficiency and its various types.

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For example, thanks to a good game in the asset market, the firm will have more sources to pay off its own obligations without attracting credit funds, for the use of which you also need to pay your price in the form of interest. And this is reflected in the total cost of the company.

Endogenous production factors affecting the profitability of the enterprise are also divided into:

• quantitative(for example, an increase in the number of workers, means of production, objects of labor)
• quality(the use of progressive, resource-saving technologies, in other words, an increase in labor productivity).

Naturally, these factors, like all others, play their role only when are economically viable(for example, if the number of sold products falls, then, all other things being equal, there is no point in hiring new employees).

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Thus, the profitability of the enterprise is a fundamental, key index that allows you to evaluate the effectiveness of the company. Among the factors influencing it, it is necessary to single out endogenous production quality, since it is the increase in labor productivity that is the main source for maximizing profits.