The formula for profitability is the key to business success

Of all the performance indicators of the enterprise, profitability is one of the most important. Unsurprisingly, after all, what can bother a businessman more than the norm of his profit? Naturally, in order to calculate this indicator, you need a formula for profitability. About how to calculate it, we will tell in this article.

The formula for profitability is extremely simple, but before proceeding to its consideration, it is necessary to give a definition of the calculated index. According to economic theory, profitability is an indicator of the economic effectiveness 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 differ. You can divide the indicators of economic efficiency into three groups:

1. By types of assets - the profitability of each of the assets available at the enterprise is calculated: 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 an asset.
2. By types of economic activity - the profitability of the performance of certain operations is estimated. The most often 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 us.
3. Profitability of the enterprise - the formula here is not one, but several: this includes the whole complex of the above-described 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, there is nothing difficult in the calculation of profitability - most often it is calculated by simple division. This indicator is widely used both in business planning and in analyzing the results of the enterprise's activities. In this case, 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 profit will be in the future. In this case, it is logical to assume that the following factors will influence the profitability:

1. Production costs - as the profitability formula shows, the costs are in the denominator, therefore, their increase reduces the target
2. The price of the sale of goods - the higher it is, the greater profit we get. At the same time, we should not forget that pricing is also subject to the influence of the laws of supply and demand, which means that we can not regulate profitability solely by changing the price policy.
3. The situation in the market - depending on the type of market (monopoly, competitive, oligopolistic), the rate of profit will also change. The less competitive market, the greater the power of the enterprise, and, accordingly, the higher the profitability it can expect. Strengthening competition, on the contrary, can force a firm to reduce profitability. The extreme case is dumping, in which the company puts so low prices that some time it works at a loss, but in this way it destroys its competitors.

Conclusion: the formula for calculating profitability is simple and understandable, but studying this indicator, and, more importantly, managing it is a complex process, requiring great attention and scrupulousness. The analysis of profitability for the past period gives an opportunity to assess the efficiency of the enterprise and is the basis for forecasting profitability in the future, and this indicator shows the feasibility of further implementation of the firm's activities.