In the article we will consider working capital turnover as one of the most important indicators for assessing the financial condition of an enterprise.

Working capital turnover

Working capital turnover (English Turnover Working Capital) is an indicator related to the company and characterizing the intensity of use of working capital (assets) of the enterprise/business. In other words, it reflects the rate of conversion of working capital into cash during the reporting period (in practice: year, quarter).

Formula for calculating working capital turnover on the balance sheet

Working capital turnover ratio (analogue: fixed asset turnover ratio, K ook) – represents the ratio of sales revenue to the average working capital.

The economic meaning of this coefficient is an assessment of the effectiveness of investing in working capital, that is, how working capital affects the amount of sales revenue. The formula for calculating the working capital turnover indicator on the balance sheet is as follows:

In practice, the analysis of turnover is supplemented with the coefficient of fixation of working capital.

Working capital consolidation ratio– shows the amount of profit per unit of working capital. The calculation formula is inversely proportional to the working capital turnover ratio and has the following form:

– shows the duration (duration) of the turnover of working capital, expressed in the number of days required for the payback of working capital. The formula for calculating the working capital turnover period is as follows:

Analysis of working capital turnover. Standards

The higher the value of the working capital turnover ratio, the higher the quality of working capital management at the enterprise. In financial practice, there is no single generally accepted value for this indicator; the analysis must be carried out in dynamics and in comparison with similar enterprises in the industry. The table below shows different types of turnover analysis.

Indicator value	Indicator analysis
K ook ↗ T ook ↘	Increasing growth dynamics of the working capital turnover ratio (decrease in the turnover period) shows an increase in the efficiency of using the enterprise's fixed assets and an increase in financial stability.
K ook ↘ T ook ↗	The downward dynamics of changes in the working capital turnover ratio (increasing the turnover period) shows a deterioration in the effectiveness of the use of fixed assets in the enterprise. In the future, this may lead to a decrease in financial stability.
Kook > K*ook	The working capital turnover ratio is higher than the industry average (K * ook) shows an increase in the competitiveness of the enterprise and an increase in financial stability.

Video lesson: “Calculation of key turnover ratios for OJSC Gazprom”

Resume

Working capital turnover is the most important indicator of the business activity of an enterprise and its dynamics directly reflect the financial stability of the enterprise in the long term.

Profitability indicators are relative characteristics of the financial results and efficiency of an enterprise. They measure the profitability of an enterprise from various positions and are grouped in accordance with the interests of participants in the economic process and market exchange. Profitability indicators are important characteristics of the factor environment for generating profit and income of an enterprise. For this reason, they are mandatory elements of comparative analysis and assessment of the financial condition of the enterprise. When analyzing production, profitability indicators are used as a tool for investment policy and pricing.

The main profitability indicators can be grouped into the following groups:

Indicators calculated on the basis of profit (income);

Indicators calculated on the basis of production assets;

Indicators calculated on the basis of cash flows.

The first group of indicators is formed on the basis of calculating the levels of profitability (profitability) based on profit indicators that are defined in the enterprise’s reporting. For example:

These indicators characterize the profitability (profitability) of sales. Using factor analysis methods, the impact of price changes is determined

on products and their cost (material costs) on changes in product profitability.

Let us denote the profitability of products of the base and reporting periods through and , respectively. By definition there is:

where is the profit from sales of the reporting and base periods, respectively;

Sales of products (works, services), in accordance with the reporting and base periods;

Cost of products (works, services), in accordance with the reporting and base periods;

Δ R- change in profitability for the analyzed period.

The influence of the factor of price changes on products is determined by calculation (using the method of chain substitutions):

Accordingly, the influence of the cost change factor on the change in profitability will be:

The sum of factor deviations will give the total change in profitability for the period:

The second group of indicators is formed on the basis of calculating profitability levels depending on changes in the size and nature of advanced funds: all production assets of the enterprise; invested capital (equity, long-term liabilities); share (own) capital. For example:

The discrepancy between the levels of profitability for these indicators characterizes the degree to which the enterprise uses financial levers to increase profitability: long-term loans and other borrowed funds.

These indicators are very practical. They meet the interests of various participants. For example; the enterprise administration is interested in the return (profitability) of all production assets; potential investors and lenders are interested in the return on invested capital; owners and founders are interested in stock returns and so on.

Each of the listed indicators is easily modeled by the method of identical transformations based on factor dependence. For example, consider this obvious dependency:

This formula reveals the relationship between profitability of sales and capital productivity (an indicator of the turnover of production assets). The economic meaning of the connection is that the formula directly indicates ways to increase profitability: with low sales returns, it is necessary to strive to accelerate the turnover of production assets.

Let's consider another factor model of profitability.

As we can see, the return on equity (shareholder) capital depends on changes in the levels of return on sales, the rate of circulation of total capital and the ratio of equity and debt capital. The study of such dependencies has great evidentiary power for assessing the financial condition of an enterprise, assessing the degree of skill in using financial levers to improve the results of its activities. From this dependence it follows that, other things being equal, the return on equity capital increases with an increase in the share of borrowed funds of the enterprise in the total capital.

Let's look at an example (Table 5.3).

Table 5 .3

Analysis of the level of profitability of production

indicators	For the last swarm	For the reporting year
1. Balance sheet profit, thousand UAH
2. Chip product sales, thousand UAH
3. Average annual cost of fixed assets, thousand UAH
4. Average annual balances of working capital, thousand UAH
5. Average annual cost of production assets, thousand UAH
6. Product capital intensity ratio, color. (Page 3 / Page 2)
7. Working capital consolidation coefficient, kopecks. (Page 4 / Page 2)
8. Profit per ruble of products sold, kopecks. (Page 1 / Page 2)
9. Enterprise profitability level,%, (page 1 / page 5) × 100

The profitability level for the reporting year was 91.6%, and for the previous year - 135.8%, then profitability decreased by 44.2 points.

The influence of factors that influenced changes in the level of profitability is determined based on the following calculations (by the method of chain substitutions):

1) an increase in the share of profit per hryvnia of sold products led to an increase in the level of profitability by 56.1 points (191.9 - 135.8), where

2) an increase in the capital intensity of products, that is, a decrease in the capital productivity of fixed production assets led to a decrease in profitability by 89.6 points (102.3 - 191.9), where

3) an increase in the coefficient of consolidation of material working capital, that is, a slowdown in their turnover, led to a decrease in production profitability by 10.7 points (91.6 - 102.3).

So, the overall decrease in profitability by factors is 44,256.1 - 89.5 - 10.7), which corresponds to the overall change in production profitability compared to last year’s data.

The third group of profitability indicators is calculated on the basis of net cash inflow. For example

The latest indicators give an idea of ​​​​the company's ability to fulfill obligations to creditors, borrowers and shareholders in cash. Profitability, calculated on the basis of cash flow, is widely used in countries with developed market economies. It is overwhelming because cash flow operations are an essential sign of an intensive type of production, a sign of the “health” of the economy and the financial condition of the enterprise.

Factor profitability models reveal the most important cause-and-effect relationships between indicators of the financial condition of an enterprise and financial results. Therefore, they are an indispensable tool for “explaining” (evaluating) the current situation.

Factor profitability models are also models for predicting the financial stability of an enterprise, controlled. The need to foresee immediate and long-term development prospects is an urgent task for enterprises. The rate of production growth depends not only on demand, sales markets, enterprise capacity, but also on the state of financial resources, capital structure and other factors.

The most important limitation on the planned growth rate of an enterprise is the rate of increase in its equity capital, which depends on many factors, but primarily on the return on sales (factor X1), the turnover of total capital (balance sheet currency - factor X2), the financial activity of the enterprise in raising borrowed funds (factor X3) rates of distribution of profits for development and consumption (factor X4).

Thus, the growth rate of equity capital, characterizing the potential capabilities of an enterprise to expand production, can be represented by a multiplicative model of the relationship between the listed factors:

Where Y- equity growth rate (equal to the ratio of profit allocated for accumulation to the average annual cost of equity capital);

The model reflects the effect of tactical (factors X1, X2) and strategic (factors X3, X4) financial decisions. Correctly implemented pricing policy and expansion of sales markets lead to an increase in the sales volume and profit of the enterprise, and increase the rate of circulation of its capital. At the same time, an irrational investment policy and a decrease in the share of borrowed capital can reduce the positive result of the first two factors.

This model is notable because it can easily be expanded to include new factors. Moreover, the manager’s field of view includes such important indicators of financial condition as liquidity, turnover of current (mobile) assets, and the ratio of current liabilities and capital.

The extended model for calculating the sustainable growth rate is as follows:

Where y - equity growth rate;

A - capital structure (the ratio of the balance sheet currency to the average cost of equity capital);

b- the share of fixed-term liabilities in the capital of the enterprise (the ratio of the amount of fixed-term liabilities (current liabilities) to the balance sheet currency);

With- current liquidity ratio (ratio of current assets to current liabilities);

d- turnover of current assets (the ratio of net sales to current assets);

e- financial result from product sales per unit of sales (return on sales) (ratio of net profit to net sales);

f- the rate of distribution of profit for accumulation (the ratio of profit allocated for investment to the amount of net profit).

The practical application of sustainable growth models is recommended in enterprise development planning, taking into account the risk of bankruptcy.

It is known that one of the criteria for bankruptcy is the unsatisfactory structure of the balance sheet, determined by the current liquidity ratio, the ratio of the provision of current assets with own funds and the amount of debt obligations in equity capital. If we take all these coefficients at the standard level, and the rate of distribution of profit on accumulation is equal to 1.0, then the optimal value of the sustainable growth rate will be 0.5 return on current assets, or 0.05 return on own working capital.

These are very important conclusions from the analysis of formulas. But it is not the numerical characteristics that are important. The important thing here is that the rate of sustainable growth depends on very unstable parameters or factors. After all, the value of current assets, i.e. working capital and own working capital are very flexible and depend on many factors: the size of the business; industry affiliation of the enterprise, that is, type of activity; growth rate of product sales; working capital structures; the fate of added value in the price of the product; inflation; accounting policy of the enterprise; payment systems and so on. So, the stability of development becomes a derivative, and one can say without exaggeration, a direct consequence of the stability of the current economic activity of the enterprise.

Profit, being an absolute indicator, does not show the level of efficiency of the organization and does not allow for a comparative analysis of the results of activities of business entities that differ in scale of production, amount of capital, range of products, etc. For these purposes, a relative indicator is used, which represents In general terms, the ratio of effect to cost is called profitability.

Profitability as an economic category expresses economic relations between business entities regarding the effectiveness of the use of capital factors. As an economic criterion, profitability characterizes the efficiency of the financial and economic activities of any economic entity relative to all others, regardless of the size and nature of the economic activity.

The methodology for determining profitability involves a variety of forms of expression for the numerator and denominator. This leads to the calculation of a large number of profitability indicators, which can be systematized based on various classification criteria - by subject of activity, by type of resource, by type of effect, by phase of activity, etc.

The system of profitability indicators, which allows you to evaluate the efficiency of an economic entity, includes (at a minimum) the following coefficients:

1) profitability of products (products) - is defined as the ratio of profit from sales of products (works, services) to the total cost of products sold.

Where Prp– profit from sales (from sales of products);

PSrp– full cost of goods sold.

The profitability of a product characterizes the amount of profit per ruble of costs for its production and sale. The product profitability indicator can be calculated both for all commercial products of the organization and for its individual types, on the basis of which a decision is made to change the assortment: expanding the output of some types of products and discontinuing others. Based on the product profitability indicator, planning for the release of new types of goods is also carried out.

In addition to the above calculation methodology, product profitability can be calculated based on the net profit indicator, and without taking into account commercial and administrative expenses, that is, based on the cost of production;

2) profitability of sales (profitability of turnover, profitability ratio) - defined as the ratio of profit from sales to sales revenue according to the formula

Where Vrp– net revenue from product sales.

This indicator reflects the share of profit in revenue and characterizes the profitability of the organization’s core activities. Return on sales is also considered as a general indicator of the financial condition of an economic entity and influences investors' decisions about the advisability of investing in a given organization. The dynamics of profitability of sales depends on changes in prices, sales volumes and costs of production and sales of products. For example, an increase in profitability of sales may be due to an increase in product prices or a decrease in costs, and vice versa. Changes in profitability of sales can also be explained by differences in the rate of change in product prices and production costs. Therefore, it is believed that this profitability ratio characterizes the organization’s pricing policy.

Factor analysis of profitability of sales allows you to make a decision on the choice of ways to increase the efficiency of the organization (profit growth either by reducing costs, or by expanding production and sales).

The return on sales indicator can be calculated on the basis of net profit and is then called the net profit ratio. Return on sales based on net profit shows the amount of profit remaining at the disposal of the organization per unit of products sold;

3) return on assets (return on investment) - defined as the ratio of profit to the average value of the organization’s assets according to the formula

Where Pch– net profit;

A– amount of assets.

Depending on the task set when assessing efficiency, one or another profit indicator can be used as an indicator of effect. In most cases, the assessment is carried out based on profit before tax (balance sheet), net profit, and profit from sales.

Return on assets characterizes the efficiency of using funds invested in the activities of an organization and provides an assessment of the profitability of their investment. This indicator reflects the amount of profit per ruble of all expended economic resources. In addition, return on assets (calculated on the basis of net profit) determines the financial potential of an economic entity and the possibilities for its development.

Return on assets (and, accordingly, the efficiency of asset use) increases in the event of an increase in profits, a decrease in the need for fixed and working capital, or with the simultaneous influence of both factors. Analysis of return on assets allows us to identify the main factors affecting the profitability of activities, the directions of their influence, and also determine the measures necessary to improve the efficiency of using existing assets.

,

Where Koa – asset turnover ratio.

Asset turnover is defined as the ratio of sales revenue to the average value of assets for the analyzed period and shows the number of turnovers made by the organization's assets during the period, thereby characterizing the efficiency of their use. The formula shows the directly proportional dependence of return on assets on the profitability (profitability) of sales and the turnover rate of assets.

Typically, during the analysis of profitability of assets, the profitability ratios of current assets and the profitability of non-current assets are additionally calculated;

4) return on equity - shows the amount of net profit that the organization receives per monetary unit of invested own funds, characterizing the efficiency of their investment.

This indicator is of particular importance for the owners of the organization, since they are interested in the most profitable investment of their funds and receiving the greatest income from this. There is a proportional relationship between the value of the indicator and the amount of income received by the owners. The higher the return on equity capital, the greater the income the owners can receive, therefore return on equity capital reflects the degree of rationality and attractiveness of investing in a given area of ​​activity, and has a decisive influence on the market value of the enterprise. This indicator is called the criterion for the profitability of the organization.

Return on equity is calculated using the formula

Where SK– own capital.

The relationship between return on equity, return on assets and return on sales can be represented by the following formula:

where Msk is the equity multiplier. It shows how an organization’s assets increase when its equity capital increases by one unit (one ruble, one percent, etc.), and also characterizes the organization’s capital structure. The multiplier is defined as the ratio of assets to the organization's equity capital;

5) profitability of borrowed capital - reflects the feasibility and effectiveness of the use of borrowed resources, which must be taken into account when forming a policy for attracting borrowed funds:

where ZK is borrowed capital.

The composition of borrowed capital takes into account the long-term and short-term obligations of the organization, the use of which is carried out on a repayable and paid basis. This necessitates a comparison of the costs associated with their production and the effect of their use.

In addition to the above profitability indicators, which are among the basic ones, an organization can calculate many others. A specific list of coefficients is determined based on the goals and objectives of the analysis and the specifics of the organization’s activities.

Basic methods of planning profit and profitability

Profit planning is an integral part of financial planning and plays an important role in ensuring the effective operation of the organization.

An economically sound determination of profit allows you to correctly assess the volume of financial resources, the possibility of making investments, replenishing working capital, and ensure timely settlements with the budget, banks, business partners, and employees. The implementation of the dividend policy and the formation of the market value of the organization depend on the volume of profit.

When planning an organization’s profit, the general provisions for planning and the specific features of the activity, forms of ownership, organizational and legal forms, conditions of mutual settlements, etc. are taken into account. During planning, factors are taken into account that will influence the activities of the enterprise in the planned period - change production volumes, changes in assortment, changes in prices for production resources, for the organization’s products, etc.

Profit planning includes:

Profit generation planning;

Planning the use of profits.

These are both independent and interrelated sections of the planning process.

The object of planning is balance sheet profit and its main elements: profit from the sale of products, profit from the sale of property and property rights, profit from non-sales operations.

Methods for planning financial results are currently not regulated, but the following basic methods are used in business practice:

1) direct counting method;

2) analytical method;

3) normative method;

4) programmed factor method;

5) economic-mathematical method.

1. Direct counting method- the simplest and most accurate method, especially convenient when the range of products of the enterprise is not too wide.

The disadvantages of the method include the difficulty of determining the impact of various economic factors on profit.

In addition, in modern conditions it is quite difficult for an enterprise to accurately determine the volume of sales of products and it is not always possible to set sales prices in advance. These considerations are the main obstacle to the application of this method.

Planning stages:

1) determination of the planned amount of profit from sales using the formula

,

Where Vrp– net revenue from product sales

SRP– total cost of goods sold

Also, profit from sales can be determined by the formula

Pr = ,

Where Цpi – selling price of the i-th type of product;

Ci– cost price of the i-th type of product;

Ki– number of sales units of the i-th type of product.

If it is impossible to directly determine the volume of product sales or if there is a fairly wide range of products, the profit on sales can be determined based on the profit from the production of products using the formula

Prp = POng+ Ptp – Pokg

Where POng– profit in the balance of unsold products at the beginning of the planned year;

Ptp– profit from the production of commercial products for the planned year;

POkg– profit in the balance of unsold products at the end of the planned year;

2) planning of profit in carry-over balances can be carried out on the basis of the profitability of the reporting year;

3) determination of the planned amount of profit from the sale of property is carried out by direct calculation based on the expected sale price of the property planned for sale and its initial (residual) value. A list of property scheduled for sale is drawn up in advance;

4) determination of the planned amount of profit from non-operating operations can be carried out based on the ratio of profit from non-operating operations and the balance sheet profit of the enterprise that developed in the reporting year.

When determining the ratio, only non-operating income and expenses associated with normal conditions of economic activity and of a permanent nature are taken into account;

4) determination of the planned balance sheet profit is made using the formula

Pbal = Prp + At + Air,

Where At– planned profit from the sale of property and property rights;

Air defense– planned profit from non-operating operations.

2. Analytical method– used for a wide range of products, as well as when it is necessary to determine the influence of economic factors on profit margins.

The basic principle used when planning profit using this method is a focus on the level of costs or the level of basic profitability based on an analysis of the organization’s activities for previous periods.

2.1 Profit planning based on the level of basic profitability of manufactured and sold products (works, services) is carried out in the following order. Planning stages:

1) calculation of basic profit based on actual reporting data, adjusted for the result of random factors, etc.;

2) determination of basic profitability:

Where Pvsp– profit on the production of comparable products;

WITH– production cost of comparable products;

3) all comparable products of the planned year are recalculated to the cost of the reporting year based on the expected percentage of change

That = ,

Where That– production of products for the planned period at the cost of the reporting year;

T– production of products for the planned period at the cost of the planned year;

ΔС%– estimated change in cost as a percentage;

4) profit from the release of comparable products for the planned year is determined:

Ptps = ;

5) the planned profit is determined in the carry-over balances of unsold products - based on basic profitability. At the same time, the balances of unsold products at the end of the planned year must be recalculated to the cost of the reporting year;

6) the planned profit from the sale of property and property rights is determined - according to the methodology used in planning using the direct counting method;

7) the planned profit from non-operating operations is determined using the methodology used in planning using the direct counting method;

8) the planned profit from the sale of incomparable products is determined using the direct calculation method as the difference between the sales price and the cost of sales of incomparable products or on the basis of the average level of profitability;

9) the planned balance sheet profit is determined:

Prp = Prps + At + Pvo + Prpn;

10) the influence on the amount of profit for the production of comparable products of economic factors is determined:

a) changes in the product mix (based on changes in the average level of profitability):

Δ P due to ass = T o × ΔR,

Where ΔR– change in the average level of profitability in percent;

b) change in the quality structure of products (based on changes in the grading coefficient):

Δ P due to quality = T o × K grade . ,

where K is grade. – change in the grade coefficient;

c) changes in product costs:

Δ P due to s/s = T o – T = ;

d) changes in product prices:

Δ P due to prices = ,

where T i is the volume of output of the i-th product for which prices have changed;

Δ C i – change in prices for the i-th product in rubles.

2.2 In the second option of profit planning using the analytical method - based on the level of costs per 1 ruble of produced and sold products (works, services), profit calculations are carried out similarly to the calculation based on basic profitability. But instead of the basic profitability indicator, the basic cost indicator is used.

In this case, profit on commodity output is planned equally for both comparable and incomparable products based on the amount of costs per one ruble of product cost:

Ptp = TP opt*(1 - Z) ,

Where TPopt– commercial products at wholesale prices (sales prices);

Z– costs per 1 rub. commodity products at wholesale prices (sales prices).

3. Normative method– is the basis for the implementation of a commercial budgeting system and is used if the organization has established norms and standards for the expenditure of resources for specific types of products and for the centers of responsibility of organizations.

In this case, the estimate (budget) of financial results is developed on the basis of the estimate of the cost of sales, the estimate of expenses for the period and the estimate of sales volumes. It also adds information about other income, other expenses and the amount of income tax.

An estimate of financial results can be drawn up for each profit center - individual divisions or structures for which it is possible to correlate the income they receive with the expenses incurred. The estimate of financial results for the organization as a whole is the result of the addition of all such estimates, and the main objective of this estimate is to ensure a given level of financial results, both in absolute form (profit) and in relative terms (profitability). If acceptable minimums for profit or profitability are met, the estimate is approved; if not, it is subject to revision based on private estimates in order to identify reserves for improving financial results for each individual profit center. Monitoring of the financial results estimate is carried out to ensure that the actual values ​​of profit and profitability correspond to the planned ones. If deviations in this estimate are identified, control actions will be aimed not at adjusting the indicators of the estimate of financial results, but at adjusting the estimates that support it.

4. Programmed factor method of planning profit and profitability– one of the most promising in modern conditions, providing for planning of profit and profitability for several options for the economic activities of organizations. As a result, it is the profit and profitability indicators that determine the choice of business option, i.e., these indicators become the initial, target ones. Planning stages:

1) calculation of basic indicators for the previous year based on the reporting ones, adjusted to the conditions in force at the beginning of the planned year and freed from random factors;

2) setting goals for economic activity for the planning year.

At this stage, the company determines target options for business options for the next year. The goals of the enterprise should determine the groups of factors that will affect the profit of the planned year. Main integrated factors:

Changes in the volume of sales of comparable products at comparable prices;

Changes in the cost of comparable products;

Release of new incomparable products;

Changes in prices for the company's products;

Changes in prices for purchased inventory items;

Changes in the valuation of fixed assets and capital investments of the enterprise;

Changes in wages;

Change in profit from other sales and non-operating operations;

Changes in enterprise assets;

Changes in the ratio of equity and borrowed capital;

Structural shifts in production and costs.

All these factors can be supplemented and detailed if necessary;

3) forecasting inflation indices. The organization determines the expected inflation indices for the planned year independently, based on its own information on price movements and the structure of costs and products. The main inflation indices reflect:

Changes in “sales prices” for products, works, services of the enterprise itself;

Changes in “purchase prices” for inventory items purchased by the enterprise;

Changes in the value of fixed assets and capital investments according to the balance sheet valuation;

Changes in average wages due to inflation;

4) calculation of planned profit and profitability for options.

Profit is calculated on the basis of the basic balance sheet profit for the previous year, which is adjusted to the value of the factors established at the second stage of planning. With this planning method, the influence of each factor on future profits (including inflation factors) is clearly visible.

5) the choice of the optimal management option is carried out taking into account the obtained profit and profitability indicators. In addition, planned profit and profitability indicators can be the main criteria when optimizing an organization's planning decisions.

The presented method is based on current reporting and does not require a significant increase in the information base, with the exception of monitoring inflation indices. This also speaks in favor of this method and makes it promising.

5. Economic-mathematical method. It is used only in large or super-large organizations, where it is possible to use a large accounting information base, computer equipment and computer programs.

Indicators of planned profit are used by the organization when calculating the target sales volume, optimizing taxation, forming a dividend policy, etc. Therefore, profit planning is of interest not only for the organization, but also for its investors, creditors, business partners and is one of the determining factors for a successful commercial activities.

Questions for self-control

1. Reveal the importance of profit in the activities of an organization in a market economy.

2. Describe the main functions of profit.

3. Name the main factors influencing the formation and distribution of profit.

4. Describe the main types of profit and their relationship.

5. Describe the concept of profitability.

6. Name the main profitability ratios.

7. What is the relationship between return on assets and return on sales?

8. What are the advantages of the analytical method of profit planning?

9. Name the main methods of profit planning.

10. What is the relationship between profit and profitability indicators?

Introduction.

In modern economic conditions, the activities of each economic entity are the subject of attention of a wide range of market participants interested in the results of its functioning.

To ensure the survival of an enterprise in modern conditions, management personnel must, first of all, be able to realistically assess the financial condition of both their enterprise and existing potential competitors. The most important thing in determining the financial condition of an enterprise is a timely and high-quality analysis of financial and economic activities.

The goal of any enterprise is profit, which is accordingly the most important object of economic analysis. However, the profit margin itself cannot characterize the efficiency of an enterprise's use of its resources. One of the main indicators characterizing the efficiency of an enterprise is profitability. Profitability, in a general sense, characterizes the feasibility of expended resources in relation to newly acquired (profit) resources.

Profitability and profit are indicators that clearly reflect the efficiency of the enterprise, the rational use of its resources by the enterprise, the profitability of areas of activity (production, business, investment, etc.).

The enterprise sells its products to consumers, receiving cash proceeds for them. But this does not mean making a profit. To identify the financial result, it is necessary to compare revenue with the costs of production and sales, i.e. with the cost of production.

An enterprise makes a profit if revenue exceeds cost; if revenue is equal to cost, then it is only possible to reimburse the costs of production and sales of products, and there is no profit; if costs exceed revenue, then the company receives a loss, i.e. negative financial result, which puts him in a difficult financial situation, not excluding bankruptcy. To obtain maximum profit and avoid bankruptcy, it is necessary to study profit indicators, factors influencing it, and the profitability indicator, which reflects the effectiveness of current costs and is a kind of synthesis of various qualitative and quantitative indicators.

The concept and economic content of profitability

One of the most important performance indicators of an enterprise is profitability.

Profitability is a general indicator characterizing the quality of work of an industrial enterprise, since with all the significance of the mass of profit received, the most complete qualitative assessment of the production and economic activity of the enterprise is given by the value of profitability and its change. It represents the ratio of profit to production assets or production costs. The profitability indicator evaluates the efficiency of production and its costs.

The main factors that have a direct impact on increasing the level of profitability in enterprises include:

1. Growth in production volume;

2. Reducing its cost;

3. Reducing the turnover time of fixed production assets and working capital;

4. Growth in the amount of profit;

5. Better use of funds;

6. Pricing system for equipment, buildings and structures and other carriers of fixed production assets;

7. Establishment and compliance with standards for inventories of material resources, work in progress and finished products.

To achieve a high level of profitability, it is necessary to systematically and systematically introduce advanced achievements of science and technology, effectively use labor resources and production assets.

According to the calculation method in the national economy, there is profitability of enterprises R pr. and profitability of products R prod. The first indicator is defined as the ratio of book profit P to the average annual cost of fixed production assets F op and working capital F ob:

R pr = (P / (F op + F ob)) x 100% (6)

The second profitability indicator is expressed by the ratio of book profit P to the cost of finished products C:

R pr = (P / S) x 100% (7)

Methods for determining profitability clearly show that the level of profitability and its changes are directly related to prices for industrial products. Consequently, an objective pricing system is an important prerequisite for determining a reasonable level of profitability, which at the same time can influence changes in the price level of products. Thus, sound methods for establishing and planning profitability are closely related to the pricing system. The amount of profit, and therefore the level of profitability, primarily depends on changes in product prices and its cost.

The concept of profitability of production compares the savings created in the process of manufacturing products with the production assets initially allocated to a given enterprise. Profitability of production serves as a measure of the efficiency of using the funds at the disposal of the enterprise.

The economic meaning of production profitability is not limited to reducing the costs of living and embodied labor for the production of a unit of output. The mass of funds involved in the production process differs significantly from their quantity, which is included in the amount of costs associated with the manufacture of products. The production process involves a huge number of fixed assets, materialized in buildings, structures, equipment and inventory. Production costs include their depreciation, that is, the share of their cost transferred in a given period of time to the cost of production. The cost of working capital will be included in production costs only in the amount spent in the manufacture of products.

Various means are used to increase production profitability. One of the main sources of growth in production profitability is an increase in the amount of profit received by the enterprise. This growth is achieved as a result of reducing production costs, changing the structure of manufactured products and such an increase in the scale of production when, while maintaining the amount of profit received from the sale of a unit of each type of product, the total amount of profit received increases.

The main factor in profit growth is the reduction in production costs. However, the amount of balance sheet profit is influenced by a number of other factors - changes in product prices, the amount of the balance of unsold products, sales volume, production structure, etc. The first factor is taken into account only in cases where there are sufficiently strong reasons to believe that a change will occur in the coming period prices (their increase due to an increase in product quality or decrease due to the aging of certain types of products, saturation of the consumer market with certain products, or due to the transition to new equipment and production technology). Increasing the profitability of production means an increase in the return on each hryvnia of advanced funds and, thus, their more efficient use.

Profitability indicators are important characteristics of the financial results and efficiency of an enterprise. They measure the profitability of an enterprise from various positions and are grouped in accordance with the interests of participants in the economic process and market exchange.

Profitability indicators are important characteristics of the factor environment for generating profit (and income) of enterprises. For this reason, they are mandatory elements of comparative analysis and assessment of the financial condition of the enterprise. When analyzing production, profitability indicators are used as a tool for investment policy and pricing.

System of profitability indicators.

Profitability indicators are the main characteristics of the efficiency of an enterprise's economic activities. They are calculated as a relative indicator of the financial results obtained by the enterprise during the reporting period. The economic content of profitability indicators comes down to the profitability of the enterprise. In the process of profitability analysis, the level of indicators and their dynamics are examined, a system of factors influencing their change, and their quantitative assessment are determined.

The main profitability indicators can be grouped into three groups:

return on capital (assets) indicators;

indicators of profitability of product sales;

indicators calculated on the basis of cash flows.

First group profitability indicators are formed as the ratio of profit to various indicators of advanced funds, of which the most important are: all assets of the enterprise; investment capital (equity + long-term liabilities); share (own) capital.

For example,

The specification of these indicators is that they meet the interests of all participants in the enterprise's business. For example, the administration of an enterprise is interested in the return (profitability) of all assets (total capital); potential investors and creditors – return on invested capital; owners and founders - return on shares, etc.

Return on assets indicators are calculated as the ratio of profit indicators to the average assets of the enterprise for the reporting period. Return on assets is the most important indicator of the efficiency of a commercial organization, the main standard (i.e., the average value in a market economy), with which individual indicators of enterprises are correlated to justify their competitiveness. Such a profitability standard (or profit margin), as the ratio of accounting profit (profit before tax) to total assets, is the main indicator of inter-industry competition, the main indicator for determining the effectiveness of investment projects. The rate of profitability (or rate of profit) tends to decrease even today. According to foreign institutes of economic analysis, it is approximately 18-20%. Hence, in the global market economy, a coefficient of 0.20 is often used to determine effective projects.

Each of the listed indicators is easily modeled using factor dependencies. Consider the following relationship:

Where is net profit;

K - all assets;

N – sales.

This formula shows the relationship between return on total assets, return on sales and asset turnover. The formula directly indicates ways to increase profitability: when the profitability of sales is low, it is necessary to strive to accelerate asset turnover.

Let's consider another factor model of profitability:

Where is own funds (capital).

As we can see, the return on equity (shareholder) capital depends on changes in the level of product profitability, the rate of turnover of total capital and the ratio of equity and debt capital. The study of such dependencies is of great importance for assessing the influence of various factors on profitability indicators. From the above relationship it follows that, other things being equal, the return on equity capital increases with an increase in the share of borrowed funds in the total capital.

Second group indicators is formed on the basis of calculating profitability levels based on profit indicators reflected in the enterprise’s reporting. For example,

Note that the arrow indicates the logic behind the formation of profit indicators.

An increase in profit can be associated with both intensive and extensive use of production resources. Therefore, the only indicator of true efficiency can be sales profitability, i.e. ratio of profit to sales revenue.

Depending on the numerator, which reflects certain aspects of economic activity, there are:

,

Where is profit from sales;

N – sales revenue in net selling prices (line 010 f. No. 2 of the profit and loss report);

2. profitability of profit according to accounting (before tax) profit

Where is accounting profit (page 140 No. 2);

3.return on sales based on net profit ():

Where
- net (retained) profit (line 190 f. No. 2).

In management accounting and analysis, the return on sales indicator is used as the ratio of profit from sales to the cost (full or production) of product sales ( ):

,

Where - cost of products sold.

(continued from page 199)

Third group profitability indicators are formed similarly to the first and second groups, however, instead of profit, net cash inflow is taken into account.

These indicators give an idea of ​​the extent to which an enterprise can pay creditors, borrowers and shareholders with cash in connection with the use of cash inflows. The concept of cash profitability is widely used in developed market economies. It is a priority because transactions with cash flows that ensure solvency are an essential sign of the “health” of the financial condition of the enterprise.

The variety of profitability indicators determines the alternativeness of searching for ways to increase it. Each of the initial indicators is decomposed into a factor system with varying degrees of detail, which sets the boundaries for identifying and assessing production reserves.

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The profit of an enterprise is the most important indicator that reflects the result of its activities and indicates how rationally and efficiently production resources were used. In a broad sense, profit is understood as a positive difference between income and costs, while a negative difference is a loss. Depending on the calculation method, profit is distinguished:

• From sales - when calculating it, in addition to the cost, administrative and commercial expenses are taken into account.
• Gross - gives an assessment of results in a broad sense, representing the difference between total sales revenue and production costs.
• Before taxation - when calculating it, operating income and expenses are additionally taken into account, as well as income and expenses from activities not related to the sale of products.
• Net - calculated after tax, calculated minus tax liabilities.

An enterprise may make a profit or loss based on the results of its activities. These indicators are subject to analysis, which will provide an understanding of what factors influenced the result, to what extent, and what actions should be taken to change the situation for the better.

Why is profit analysis carried out?

Analysis of the indicator will allow us to solve the following problems:

• assessment of the compliance of the obtained financial result with the planned profit indicators, taking into account the volume of products sold;
• assessment of strategic objectives in terms of profit generation;
• identification of factors and components, as a result of which the actual profit indicator deviated from the planned one;
• identification of methods by which it will be possible to improve the profit level indicator.

Carrying out the analysis allows the company's management to determine the main ways for further development of the enterprise and to find hidden reserves to improve financial results. The results obtained help to identify bottlenecks, adjust plans, increase the efficiency of resource use and the company’s activities as a whole.

Sources of information for estimating profits

To conduct a comprehensive analysis of the indicator, company management uses information from:

• financial statements;
• profit accounting register;
• financial plan.

How to increase profits

Increased profits can be achieved by increasing revenues or reducing enterprise costs. Sales income can be increased by increasing sales volumes or product costs. An increase in cost can have the opposite effect - a drop in sales. Therefore, this method is used less frequently, usually during times of rising inflation. Before raising the price, it is necessary to study the market, competitors' offers and consumer expectations. There are non-price methods to stimulate profit growth. These include a balanced marketing policy, expansion (updating) of the assortment, improving product quality, etc. Cost reduction can be achieved through efficient use of resources. Today, innovative technologies are actively used for this, which make it possible to more efficiently use fuel, raw materials, labor resources, and reduce depreciation charges. You can also reduce costs through competent logistics, the use of staff optimization (outsourcing), and the use of modern cost management methods. It is necessary to evaluate profits, as this allows you to identify deviations from planned indicators and respond to external challenges in a timely manner. Based on the analysis, the management of the enterprise can develop a set of measures that can qualitatively improve the financial result.