- What is profitability and why is it important?
- Why analyze negativeprofitability?
- What is the unprofitability of the enterprise in certain categories?
- What does the low profit margin indicate?
- Unprofitability is a wake-up call for investors
For all owners and managers of enterprises, organizations or companies without exception, unprofitability is the worst word. This phenomenon indicates the inefficiency of entrepreneurial activity, which leads not only to a lack of profit, but also to debts.
What is profitability and why is it important?
The profitability indicator is the most significant, as it illustrates the profitability of the organization. When analyzing it, experts study the actual figures at 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 profit exceeds expenses. The unprofitability of an enterprise is, in other words, its unprofitability. In fact, unprofitability is called the value of the indicator less than one.
Why analyze negativeprofitability?
Strictly speaking, negative profitability is conditionally called, emphasizing the inefficiency of the enterprise. If unprofitability is found during the analysis of economic indicators, this means that there are shortcomings in the production process, marketing or management strategy. The numerical value of negative profitability shows how difficult the situation is in the company, and also clearly illustrates the impossibility of further functioning of the organization in the usual mode (after all, if expenses exceed profits, the problem only gets worse over time).
What is the unprofitability of the enterprise in certain categories?
The overall decline in yields may be triggered by the influence of one or more factors. To identify "weak links" and determine the intensity of their impact on the overall unprofitability of the enterprise, economists resort to calculating the profitability of assets, personnel, fixed assets, products, sales, and many other categories.
They are determined by replacing the sum of total expenses in the denominator of the fraction (profit / total expenses) with personnel costs, the cost of production assets, and the cost of production.
What does the low profit margin indicate?
The lack of profit from the sale of manufactured products indicates an error in the calculation of prices. The unprofitability arose due to the low price, which does not cover the costs of manufacturing, transporting and advertising goods.
Increasing the value of negative profitability in proportion to the price level. If we are talking about an indicator of minus 20% or less, then the manager should seriously think about introducing innovations and radical measures. Otherwise, the business will have to close.
The same situation is observed when calculating the profitability of production, but the denominator is the cost and sales of products in monetary terms.
Not the last role in the activities of any organization is the staff. More precisely, he makes the greatest contribution to the financial success or failure of the enterprise. The profitability of personnel shows how much the costs of maintaining employees and their jobs pay off.
In the case of disappointing or frankly low performance, the manager is forced to take measures to reduce costs or increase the productivity of employees. Savings can be achieved by reducing payments (bonuses, bonuses, remuneration) or laying off part of the staff.
At the same time, staff development, introduction of strict discipline, improvement of the motivation system can quickly increase key indicators.
Unprofitability is a wake-up call for investors
By 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 unprofitability is a negative profit, thenthe value of the company's shares will soon be greatly reduced. Most experienced investors do not wait for the situation to worsen and withdraw funds from the project.
At the same time, in some cases it makes sense to wait for the alignment and stabilization of the share price: for example, in case of temporary unprofitability, which will disappear when losses and expenses are reduced.