Every entrepreneur knows what profit is and how to calculate it, because this is the main goal (or one of them) of any economic activity. However, when counting the long-awaited banknotes, you can find that the actual amount differs significantly from the expected. The reason is often various factors that affect the amount of profit. Their list, classification and degree of influence will be described below.
Briefly about the concept of "profit"
This term is the difference that is calculated by subtracting from the total income (revenue received from the sale of goods or services, fines and compensations paid, interest and other income) costs incurred for the purpose of acquiring, storing, transporting and marketing the product companies. What is profit can be more vividly illustrated by the following formula:
Profit=Income - Expenses (costs).
All indicators should be converted into monetary terms before calculations. There are several types of profit: accounting and economic, gross andclean. There are several views on what profit is. The definition of its various types (accounting and economic, gross and net) is necessary to analyze the economic situation in the company. These concepts are different from each other, but their meaning in any case is the most striking characteristic of the efficiency of the enterprise.
Profit indicators
Knowing what profit is (the definition and formula are presented above), we can conclude that the resulting figure will be absolute. At the same time, there is profitability - a relative expression of how intensively an enterprise works and what is its level of profitability in relation to a certain base. A company is considered profitable when the amount of income received (proceeds from the sale of goods or services) not only covers the costs of production and sales, but forms a profit. This indicator is calculated by the ratio of net profit to the cost of production assets:
Profitability (total)=Net profit / (Amount of fixed assets + Amount of tangible assets) x 100%.
Other profit indicators (profitability of products, personnel, sales, own assets) are calculated in a similar way. For example, the product profitability indicator is found by dividing the profit by the total cost of this product:
Profitability (of products)=Net profit / Costs of production and sale of the product (cost) x 100%.
Most often this indicator is used to carry out analytical calculations of on-farmvalues. This is necessary in order to control the profitability or unprofitability of specific products, introduce the manufacture of new types of goods or stop the production of unprofitable products.
Factors affecting profit margins
An integral part of the activity of any successful organization or enterprise is the strict accounting of costs incurred and income received. Based on these data, economists and accountants calculate a lot of indicators to reflect the dynamics of development or degradation of the company. At the same time, they study the factors that affect the amount of profit, their structure and intensity of impact.
By analyzing the data, experts evaluate the past activities of the enterprise and the state of affairs in the current period. The formation of profits is influenced by many interrelated factors that can manifest themselves in completely different ways. Some of them contribute to the growth of income, the effect of others can be characterized as negative. In addition, the negative impact of one of the categories can significantly reduce (or completely cross out) the positive result obtained due to other factors.
Classification of profit determinants
Among economists, there are several theories about how to separate factors that affect profit margins, but the most common classification is:
- External.
- Domestic:
- non-production,
- production.
Besides, allfactors can also be extensive or intensive. The former illustrate the extent to which and for how long production resources are used (whether the number of employees and the cost of fixed assets change, whether the duration of the work shift has changed). They also reflect the waste of materials, stocks and resources. An example would be the production of defective products or the generation of large amounts of waste.
The second - intensive - factors reflect how intensively the resources available to the enterprise are used. This category includes the use of new progressive technology, more efficient use of equipment, the involvement of personnel with the highest level of qualification (or measures aimed at improving the professionalism of their own employees).
Regarding production and non-production factors
The factors characterizing the composition, structure and application of the main components of production that take part in the process of profit formation are called production factors. This category includes the means and objects of labor, as well as the labor process itself.
Non-manufacturing should be considered those factors that do not directly affect the manufacture of the company's product. This is the order of supply of inventory items, how products are sold, financial and economic work is carried out at the enterprise. The characteristics of the labor and living conditions in which the employees of the organization are located also apply to non-production factors,because they affect profit indirectly. However, despite this, their influence is significant.
External factors: list, nature and degree of impact on profits
A feature of numerous external factors that can affect the profitability of an enterprise is that they do not depend on managers and staff in any way. Among them should be highlighted:
- The demographic situation in the state.
- Presence and rate of inflation.
- Market conditions.
- Political stability.
- The economic situation.
- Loan interest rates.
- Dynamics of effective consumer demand.
- Price for imported components (parts, materials, components).
- Features of tax and credit policy in the state.
All these external factors (one or more at the same time) will inevitably affect the cost of production, the volume of its production or the number of products sold.
Specific internal factors on which the amount of profit depends
Increase in profits of an organization can occur with an increase in cash receipts or as a result of a reduction in expenses.
Internal factors reflect the production process itself and the marketing organization. The most tangible impact on the profits received by the enterprise, the increase or decrease in production and sales of goods. The higher these indicators, the more income and profit the organization will receive.
The next most important internal factors are the change in the cost and price of the product. The greater the difference between these indicators, the higher profit the company can get.
Among other things, the structure of manufactured and sold products affects the profitability of production. The organization is interested in producing as many profitable products as possible and reducing the share of unprofitable products (or completely eliminating them).
Ways to cut company costs
There are several methods entrepreneurs can use to cut costs and increase profits. First of all, specialists review and analyze ways to reduce the cost of production, the transportation process or sales.
The next consideration is the issue of staffing. If possible, cut various free privileges, bonuses, bonuses and incentive payments. However, the employer cannot reduce the rate or salary of employees. Also, all mandatory social payments (sick leave, travel, vacation, maternity and others) remain at the same level.
In extreme cases, the manager is forced to resort to the dismissal of freelance and temporary employees, the revision of the staffing table and the reduction of the team. However, he should carefully consider such steps, because the dismissal of workers will not lead to an increase in profits if the volume of output and sales of the product decreases.
What is the optimization of tax payments
A business can save money by cutting taxes,which will be included in the budget. Of course, we are not talking about evasion and violation of the law. There are completely legitimate opportunities and loopholes that, if used properly, can lead to increased profits.
Tax minimization does not mean a literal reduction in tax payments, but rather an increase in the financial resources of an enterprise, as a result of which special taxation systems with various preferential conditions come into force.
A completely legal and legitimate way of keeping tax records, designed to increase profits and reduce taxes paid, is called tax planning.
Due to its effectiveness, today tax minimization is becoming almost a mandatory procedure for many enterprises. Against this background, doing business on general terms, without using available tax incentives, can be called short-sighted and even wasteful.
Intangible factors
Despite the fact that some factors that affect the amount of profit of an enterprise are sometimes beyond control, the decisive role in achieving high incomes belongs to a properly built organizational system at the enterprise. The stage of the company's life cycle, as well as the competence and professionalism of the management personnel, to a large extent determine how noticeable the influence of certain factors will be.
In practice, it is impossible to quantify the impact of a particular factor on profit indicators. Soa factor that becomes difficult to measure, for example, is the business reputation of a company. In fact, this is the impression of the enterprise, how it looks in the eyes of its employees, customers and competitors. Business reputation is formed taking into account many aspects: creditworthiness, potential opportunities, product quality, service level.
Thus, you can see how wide the range of factors affecting the profit of the enterprise. However, a specialist who applies methods of economic analysis and is versed in the current legislation has various ways to reduce costs and increase company revenues.
