Profitability is an important indicator for those who are thinking about individual entrepreneurship or creating a more serious organization and begin to learn, learning about the pitfalls in the business world. But if profitability is positive, then this is good, and such an entrepreneur should only care about one thing: how to make it even bigger? Otherwise, a dangerous precedent is created, which in the future can lead to ruin and closure. What to do if profitability indicators are negative? That's about such profitability and will be discussed in the article.
What is meant by negative profitability?
To start - What is profitability? By this we mean the value in monetary terms, which is returned from one monetary unit invested in the enterprise. If they invested 1,000,000 rubles into the enterprise, and a year later they received 1,100,000 rubles in their hands, then they say that the profitability is 10 percent, or the profitability ratio is 1.1. Such numbers were given not in vain: in the Russian Federation, the average profitability of real production is around 10 percent. The negative value of profitability is a negative phenomenon in the affairs of any business, but with the application of a sufficient amount of effort and mind, it can be overcome.
Very often this concept is confused with payback. This mistake does not need to be made. Payback means how long all invested money will be returned, and profitability is responsible for how much money the invested amount brought for a certain period.
Often, for simplicity, they even draw an analogy on one ruble. A man invested one ruble, but received two. So, the profitability ratio is two. A man invested a ruble, and received ninety kopecks, which means a negative profitability of 0.9.
But we have not yet fully understood the terminology. What is negative profitability? When a person invested one million rubles in an enterprise, and received only eight hundred and fifty thousand back, the profitability ratio becomes 0.85, and the operating enterprise has negative profitability.
Causes
When can negative profitability occur? In the event that a huge amount of finished products is deposited in the company's warehouses, which cannot be sold. But since it was manufactured, it was spent on materials and work of people who are paid, so the total profit of the enterprise is divided by the total cost of all manufactured products. Or if products are sold cheaper than their cost, negative profitability also arises. There are two main ways to overcome it.
Overcoming through the introduction of new technologies
Initially, in order to increase the sale of the remaining products, you should think about cheaper products while increasing quality. This is most effectively helped by new technical solutions used both in the manufacture of products and in improving its practical capabilities. One of the most promising ways, if not the most promising: to offer a product with useful functionality that no other competitor can provide.
In general, cost reduction without loss of quality is important. This helps to produce quality products without risking their reputation. Even more, good products at a low price diverge very quickly, which allows price maneuvers in the market to squeeze competition.
other methods
It is possible to overcome the problem of competition and negative profitability by cutting social benefits, reducing wages or moving to an illegal basis. But it should be remembered that the first two options can lead to strikes, discontent among workers and / or a deterioration in the quality of work performed. The transition to an illegal position is fraught with fines on the part of state bodies, as well as legal liability for persons who organized tax evasion. Negative return on equity by such methods is not solved, as the inevitable is just delayed - the ruin of the enterprise. Therefore, resorting to these funds is strongly discouraged.
Conclusion
Negative profitability is a bad situation, but it can be corrected if enough effort is made. Initially, bet should be made on new technologies and labor efficiency of workers. It will be useful if the company can afford a small research laboratory, before which the task will always be one - the best product at a lower price. And then the reputation and quality products will do their job. The main thing is not to be afraid to look forward and move into the unknown with confidence in the stable future of the company.
