Evaluating the effectiveness of a company at the level of its own intuition or some abstract indicators is an inefficient and thankless task. There is the concept of "profitability of production", which means calculating profit for a unit of goods.
Cost and retail price
Assessing the effectiveness of products sold allows us to draw conclusions about the work of the enterprise as a whole, and, if necessary, make adjustments to the organization of business processes. In order to calculate the profitability of products, it is necessary to understand how much the cost is spent on creating one unit of goods and its "support" by the manufacturer until the moment of sale and profit, respectively. It is necessary to consider not only the real cost, but also the costs of storage, transportation, advertising. All these indicators should be expressed as financial units (to simplify the calculations).
Product Profitability: Formula
You can calculate the effectiveness of the product by making a proportion. To do this, you do not need to use a large number of numbers and take into account special conditions. In the field of the numerator, you must enter the profit received from the sale of one piece of goods, and the full amount of expenses should be in the denominator. The result of the calculations is multiplied by 100%.
It is appropriate to express the profitability of products as a specific amount or as a percentage. In the first case, we get the absolute value, and in the second, the relative value. Experienced analysts advise choosing the second option, since it allows you to easily enter the results into other studies and evaluate the success of the corporation by the sum of the indicators. The above formula is suitable for any type of goods and services. If desired, you can calculate the annual profitability of production. The proportion is slightly modified and represents the ratio of profit for the desired period to the amount of fixed assets and assets in circulation. This study allows you to understand whether the corporation as a whole works effectively.
We estimate the received figures
It is important to understand that product profitability is not a one-time use formula. Regular research and control of profit indicators are the key to the stable operation of the enterprise and its successful development. Of greatest interest to the analyst is the company owners and investors. Confirming good profit indicators in the form of tables and calculations, you can clearly demonstrate the success of the company to people who want to invest their money in this business.
Constant monitoring of the economic efficiency of the enterprise will help to timely identify the decline in profits, quickly identify the causes of this phenomenon and adjust the situation. It is also useful to compare the profitability of products sold with that of competing organizations. Serious corporations often provide the public with this data in publicly available reports.
Factors Affecting Product Efficiency
Having calculated the profitability of the products sold, it is possible to evaluate which cost items should be reduced. If this indicator does not meet the expectations of company management, there may be two reasons. In the first case, the production of goods is organized incorrectly and involves excessive costs, in the second case, the market value of the unit is underestimated. An interesting fact: in many cases the cost of production can be reduced without compromising quality.
It is primarily about the modernization of production and related processes. This is the case when success can bring a large one-time investment.Of course, the development of a change strategy requires in-depth and diverse studies of the company's activities and the market segment of interest. Significant transformations should be carried out only with a high probability that they will lead to success.
Regularly calculate the profitability of products is also necessary due to the natural increase in cost. The increase in the cost of raw materials, the content of production and other related items of expenditure is an annual phenomenon. Accordingly, if profitability is reduced precisely because of an increase in the real value of the goods, it is time to review their prices and increase sales prices.
