Non-profitability is a lack of profit, a sign of inefficiency of the enterprise

For all owners and heads of enterprises, organizations or companies without exception, non-profitability is the worst word. This phenomenon testifies to the inefficiency of entrepreneurial activity, which leads not only to the lack of profit, but also to arrears.

What is profitability and why is it important?

The indicator of profitability is the most significant, as it illustrates the profitability of the organization. When analyzing it, specialists study the actual figures for the current moment and the dynamics of changes in the indicator for previous periods. The value is determined by the ratio of net profit to the amount of expenses.

A profitable enterprise shows a positive indicator, that is, its profits exceed expenditures. The unprofitable nature of an enterprise is, in other words, its loss-making. Actually, the value of the indicator is less than one.

Why analyze the negative profitability?

Strictly speaking, the negative profitability is called conditionally, emphasizing the inefficiency of the enterprise. If in the course of the analysis of economic indicators there is an unprofitability, it means that there are shortcomings in the production process, marketing or management strategy. The numerical value of the negative profitability shows how difficult the situation is in the company, and also graphically illustrates the impossibility of the organization's continued operation in the usual mode (after all, if the expenses exceed the profit, the problem is only worsened with time).

What is the non-profitability of an enterprise in certain categories?

The general decline in profitability can be triggered by the influence of one or several factors. To identify the "weak links" and to determine the intensity of their impact on the overall unprofitability of the enterprise, economists resort to calculating the return on assets, personnel, fixed assets, products, sales, and many other categories.

They are determined by replacing the total costs in the denominator of the fraction (profit / total costs) by the costs of maintaining staff, the cost of production assets, the cost of production.

What does the low profitability of sales indicate?

The lack of profit from the sale of manufactured products indicates an error in the calculation of prices. Non-profitability arose due to the low price, which does not cover the costs of manufacturing, transportation and advertising of goods.

The increase in the negative profitability is proportional to the price level. If we are talking about the indicator minus 20% or less, then the leader should seriously think about the introduction of innovations and radical measures. Otherwise, the business will have to be closed.

The same situation is observed when calculating the profitability of production, however, the costs and sales of products in monetary terms become the denominator.

Not the least role in the activity of any organization is played by personnel. More precisely, it makes the greatest contribution to the financial success or collapse of the enterprise. Profitability of the personnel shows, how much the expenses for the maintenance of workers and their workplaces pay off.

In case of disappointing or frankly low indicators, the head must take measures to reduce costs or increase the productivity of employees. Savings can be achieved by reducing the payments (bonuses, bonuses, rewards) or dismissal of a part of the state.

At the same time, improving the skills of personnel, introducing strict discipline, improving the motivation system can quickly raise key indicators.

Non-profitability is an alarming signal for investors

Investing in the development of the enterprise, the investor expects to subsequently receive a certain profit. Under the terms of the agreement, he is provided with reliable information about the unsuccessful management and financial problems of the owner of the organization.

Since non-profitability is a negative profit, the value of the company's shares will soon be very reduced. Most experienced investors do not wait for the deterioration of the situation and withdraw funds from the project.

At the same time, in some cases it makes sense to wait for the leveling and stabilization of the stock quotation: for example, with temporary non-profitability, which will disappear with a reduction in losses and expenses.