To record the profitability of production in simple words

production profitability is

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How to find out if an enterprise, company, firm is effective? What formulas are used to determine the effectiveness or unprofitability of business projects?

According to such indicators as profit, cost, it is impossible to get an objective assessment, to see the real picture of the results of the profitability of any enterprise.

These absolute indicators allow us to evaluate the effect of production. But it is impossible to find out how the resources, property, capacity of the enterprise are used according to these indicators.

In order to find out how effective a business of any scale is, relative indicators are needed that allow you to evaluate and compare the effectiveness of the business as a whole, of all its parts separately.

To do this, they deduced a simple formula in which you need to divide the total, balance sheet profit by the amount of fixed, working capital.

Here is the formula: Net profit / cost - is called the profitability of production.

What is production profitability?

Well, now the same thing, but in a simple and understandable language. That is, using practical examples, or as they say, “I explain on my fingers” what the profitability of production is.

For example, you sold goods or services for five million rubles, after deducting all expenses, which include the cost of goods, logistics, employee salaries, taxes, rent, utility bills, advertising costs, and so on, you received the amount of net profit, let's say - one million rubles.

Now let's divide one million rubles of net profit into revenue - five million rubles. We get a profitability ratio of 0.2, or 20 percent.

Profitability of production is 20%. How to increase this indicator? How to calculate what is the weak link in your business that can be made more effective?

To do this, there are 12 basic profitability ratios

These profitability ratios are important in determining the efficiency of production as a whole, each of its parts separately.

It is these twelve coefficients that indicate how rationally all assets and funds are used in the distribution of profits.

Profitability ratio of an asset (ROA - determines the profit from assets). It makes sense to calculate this indicator only if the enterprise has passed the break-even point, that is, it has exceeded the profitability threshold;
Return on equity ratio (ROE - net profit to fixed (own) capital);
Return on current assets (RCA - profit from current assets);
Profitability ratio of non-current assets (RFA - shows the degree of efficiency in the use of long-term funds of enterprises, such as buildings, structures, etc.);
Return on investment ratio (ROI - profit received from the invested funds of investors). In this case, it is necessary to divide the net profit by the amount of investment. You will understand what part of the profit was received at the expense of investors;
Return on sales ratio (ROS - profit from the sale of basic products, services);
The profitability ratio of the product (service) (ROM - net profit divided by the cost of production);
Accounting profitability ratio (net profit before tax is divided by revenue from sales of goods or services);
Profitability ratio of personnel (ROL - the ratio of net profit to the average number of all workers, or to the number of employees in the sales department);
Net profit ratio (net profit / proceeds from sales of goods);
Gross margin ratio (the ratio of gross profit to revenue from sales of goods);
Cost-effectiveness ratio (the ratio of profit before taxes to the full cost of sold products, services);

Data for calculating profitability is taken from accounting reports, balance sheet.

You decide to invest in someone else's business;
You have decided to open your own business.

An example of calculating the profitability of a business idea

Or, for example, you got an idea for a business - breeding poultry. It is impossible to start any business without calculating profitability. You need to draw up a business plan that includes all costs:

Acquisition of chickens (or eggs for an incubator);
Feeding costs (calculations are taken from the standards for each type of bird to the final fattening state);
Maintenance costs (heating, lighting, rent of premises);
Maintenance and care costs (compensation of employees, payment of own labor);
Additional costs are taken into account for vaccinations, medicines, bedding material, transportation, taxes, risks, and so on;
Enter the estimated mortality, which on average is up to 10% of the total weight of the bird.

For example, you bought 1,000 chickens, of which 900 birds can probably survive to adulthood. That's it, taking into account the percentage of marriage and case, you need to calculate the gross income.

Subtract expenses from gross income. Divide the net profit by the gross income, and you get the profitability of production. These calculations will clearly show you how profitable your business will be, whether it is worth starting it. Such calculations will protect you from unpleasant surprises and disappointments, from loss of money and time.

Profitability of production, conclusion

Now you know what the profitability of production is, you can calculate it yourself before starting your own business. It is necessary to be 100% sure that the enterprise will be highly profitable, profitable, and will pay back investments in a short time.

If you are looking for an idea to start your own business, I recommend reading the following articles:

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