How to calculate the profitability of an organization

Increasing profitability is the most important task of the enterprise. In a brutal competitive world, it is very important to bring the business structure to a minimum percentage of profitability. This requires an economic forecast and knowledge of how to calculate profitability.

When the firm receives revenue for a certain period, this amount includes all depreciation expenses, purchase of raw materials, salary for employees, utility expenses, etc. Therefore, it should be noted that it is very important to know how to calculate the profitability of the enterprise. This will allow you to have an advantage over competitors, fully reveal the potential of the organization, earn a fairly substantial amount of profit. Taking away all the received costs from the total amount of revenue, you can get the profit of the enterprise, which is expressed in monetary terms. Starting from the importance of this knowledge and having great ambitions of the enterprise, we will consider the whole point of the question how to calculate profitability. It is the final profit that shows the level of efficiency of the enterprise. But if even an inexperienced novice economist can calculate the profit, then understand how to calculate the profitability is sometimes difficult even for the wise head of the enterprise.

There are two profits: gross and net. Before you calculate the profitability of an enterprise, you need to know its profit. The difference between net revenue and cost is the gross difference. Well, if you take away all the company's expenses (depreciation, taxes, leases) from gross profit, it will be a net profit.

First of all, profitability is the main indicator of the effectiveness of the whole activity of the enterprise, and it is expressed in percentages (although it can be considered as a coefficient). Let's consider some variants of indicators: profitability of assets, sales, main activity, equity, etc.

In order to obtain a profitability ratio, it is necessary to divide the received profit by the used assets, after which the obtained answer is multiplied by 100%.

Let's consider a couple more options, how to calculate profitability. In order to know the return on assets, it is necessary to divide the net profit by the number of assets per year. In order to calculate the return on equity, you need to divide the net profit by the total amount of equity.

Among other things, it is important not only to monitor and calculate the profitability of the enterprise as a whole. A very significant factor remains that the organization itself keeps afloat - this is its resources. Do you want to buy new products? Leave the same prices or lower if demand falls? How to reduce the cost without losing quality? These and many other issues are related to the organization and evaluation of the use of company resources. And here we should also approach the issue of how to calculate the profitability of products very seriously.

Profitability of production is another indicator of the enterprise. You can calculate it as, in general, for all products sold, and for individual items. Consider the first option. The ratio of profit from the sale of products to the costs of its production and sale. There are also other ways of calculating profitability, for example: a calculation of the ratio of the profit from the realized commodity output to the proceeds from the sold goods; Calculation of the ratio of balance profit to revenue from sales of products. All indices show the efficiency of the company's costs for raw materials and income of products sold.

Consider the second option. The coefficient of profitability of individual items of production in this case depends on the value at which the product will be sold to the consumer, and on its cost price.

For successful business, the company's founders must necessarily know the effectiveness of their organization's activities. That is why it is important to know and be able to calculate the profitability of the enterprise.