How to analyze the profit and profitability of the enterprise?

The efficiency of the enterprise can be determined both in absolute terms and in relative indicators. The absolute indicator of efficiency, without any doubt, is profit, and its relative size can be estimated by calculating profitability indicators. To study the effectiveness of the firm and the formulation of any management decisions, it is likely that it will be insufficient to simply calculate these indicators. More substantial results can be achieved if we analyze the profit and profitability of the enterprise. In this connection, it makes sense to dwell on the main analysis techniques that may be useful.

One of the varieties of analysis is the factor analysis of the profit and profitability of the enterprise. This analysis is based on the study of the model, describing the impact on profit of such factors as production volume, price and unit cost of production. In this model, the indicators are related as follows: profit is defined as the product of sales volume (in tons, pieces, etc., that is, in natural units) by the difference between the price and unit cost. If information is available for several periods or planned and actual indicators, the isolated influence of each factor on the amount of profit is determined. In most cases, resort to the method of chain substitutions or its modifications. With regard to the analysis of profitability, in this case the model is supplemented as follows: the profit is divided into prime cost (the product of the sales volume per unit cost), and by simple transformations one can conclude that the profitability is affected only by the price and unit cost. Further analysis is carried out in the same way.

The above method does not take into account the heterogeneity of the cost of production, that is, the presence in its composition of a constant and variable part. To conduct a more accurate study, conduct a margin analysis of the profit and profitability of the enterprise. This name is due to the fact that profit in this case is determined by the difference between the commercial margin and the amount of fixed costs. In turn, the commercial margin (the amount of coverage) represents revenue, reduced by the amount of variable costs. In order to more easily account for the influence of factors, the amount of coverage is represented as the product of sales volume and the price difference and variable costs determined per unit.

As you can see, the model described allows us to take into account not only a greater number of factors, but also a greater number of connections between them. Profitability in this case is also represented through the ratio of profit margins. How to reflect the profit we have already figured out, and the cost price is expressed as the sum of fixed costs and the product of variable costs per unit and sales volume. To both of the models described, a method is used to study the influence of factors, which we have already mentioned-chain substitutions.

However, the easiest way to conduct a horizontal analysis of the profit and profitability of the enterprise, which implies a study of the change in indicators in the dynamics. For this it is necessary to calculate both absolute and relative changes. The latter are often represented as the coefficients of dynamics. Of particular interest is the comparison of the growth rate of profit and the growth rate of assets. If profits grow faster than assets, then we can talk about improving efficiency, otherwise - efficiency is reduced.

Of course, it is necessary to carry out the analysis using the methods described above. Depending on the information available or on what level of error you are willing to tolerate, you have a choice between the traditional factor model and margin analysis. In addition, it should be noted that the factor analysis can be made on the basis of the company's accounting statements, namely, the income statement. In this case, several other factors will be studied, for example, commercial and management expenses, taxes, other income and expenses.