Why should you calculate your company's profitability?


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Any commercial organization exists to make profits.



However, the initial investment can be so large that it is difficult to understand how profitable the venture is, to understand the effectiveness of the business processes, management, company prospects, the correct use of resources, and the concept of "profitability" used. 

 

 

What is profitability in simple words?

 

 

Profitability indicates the productivity of the use of various business resources of the company. This productivity is expressed in net profit or loss over a given time. 

 

 

This value is a numerical or a percentage value.

 

 

The profitability ratio is one of the main indicators in the analysis of the company's performance. 

 

 

This ratio often makes how well the financial model works clearly and it shows also how quickly the investment pays off.

 

 

Why should you calculate your company's profitability and what its result means and shows?

 

 

There are several situations in which profitability ratios have great importance. 

 

 

The coefficient is calculated when necessary :

 

 

  • Make a business plan to assess the feasibility of investing in the project.

 

 

  • Justify large investments to understand the projected return on the project.

 

 

  • To determine the acceptable range of prices for comparison with competitors and attracted customers.

 

 

  • Analyze management so you can understand the key management and organizational issues that require your attention.

 

 

  • Predict the possible amount of revenue in the next period.

 

 

  • Prepare your company's sales so you can determine the real value of your business.

        

 

An objective assessment of profitability is possible only when analyzing indicators in dynamics for different periods. 

 

 

If the ratio increases, then the company is profitable. If there is a decrease and it becomes smaller, then there is no need to talk about the profitability of the business.

 

 

Factors that may affect your profitability :

 

 

The head of the company or the owner of the business seeks to control and increase the level of profitability of the company. 

 

 

To do this, the entrepreneur must take into account the factors that could affect this indicator.

 

 

External :

 

 

External factors cannot be influenced by the managers or employees. It remains to accept and look for ways out of the situation.

 

 

External factors include :

 

 

  • The amount of taxes.

 

 

  • Change in demand (for example, seasonal).

 

 

  • National or regional economic situation.

 

 

  • Political course in the country.

 

 

  • Sanctions of other states.

 

 

  • Competition.

 

 

  • Location of the firm.

 

 

Internal :

 

 

These are the current characteristics of the business and the processes that take place within it.

 

 

These factors include:

 

 

  • Pricing policy.

 

 

  • Quality of services or goods.

 

 

  • The volume of production.

 

 

  • Personnel qualification.

 

 

  • Effectiveness of marketing campaigns.

 

 

  • Working conditions.

 

 

  • Company reputation.

 

 

  • Organization of logistics.

 

 

  • Technical equipment.

 

 

  • Communication with partners and clients.



Flaws in the internal organization of your company can be a serious reason for the low profitability of your business, even under favorable external conditions.