Profit from the activities of the enterprise is the main source of financing for its further development and functioning. Despite this, the main goal of the company’s activity is the accumulation and preservation of capital, which is why it is important to calculate the system of expenses and income in such a way that the money invested will return as soon as possible, and the company will begin to pay dividends to its management.
The need for profitability forecasting
Enterprise profit planning is an important stage in the formation and development. It helps to organize its functioning in such a way that at the minimum financial costs it would be possible to get the maximum benefit, in accordance with the tasks set in the business plan for the future.
Enterprise profit planning is focused on meeting such needs:
- Payment of salaries and incentives for workers.
- The accumulation of equity, intended for investment in the modernization and expansion of the technical base.
- Payment of debts and regular payments to the management and management personnel, creditors, investors and government agencies to which there are obligations.
- The increase in the amount of profit in relation to the possible risks from strategic actions.
- Guaranteed retention of competitiveness of the enterprise in the market.
- The maximum increase in profitability.
Knowing the approximate amount of earnings, you can determine whether the business pays off in practice and whether amendments need to be made to adjust and improve it.
Organization Budget System
Income is a key indicator of a company's profitability. Roughly speaking, this is the difference between profit and all associated costs, reflecting the benefits from the sale of goods and services, expressed in material terms.
A company can obtain financial growth from such sources:
- Economic income is the revenue received, deducting the cost of goods.
- Accounting income - not only expenses spent directly on production, but also payment for related services are subtracted from profit.
- Net income is the balance representing the difference between accounting income and taxes paid.
Enterprise income sources
The main profit is formed due to the accumulation in the budget of money from such sources:
- Sale of finished products or blanks, semi-finished products and raw materials.
- Payment for work in another factory: transportation, repair services or construction.
- Revenue from sales of goods and services at points of sale.
- Dividends from securities.
- Selling franchises, real estate, etc.
Gross margin
This indicator is formed in the total activity of the enterprise: production, management, investment, financial and others. It accumulates in two stages: the release of goods and their sale in order to obtain capital.
Key indicators and factors affecting gross profit
There are two large groups of factors: internal and external.
The company's activities and its management have an impact on such indicators:
- The size and volume of manufactured goods, as well as their range and quality.
- The amount of resources expended and the time taken to produce a unit of output, in other words, the cost.
- The amount of working capital that the company has in the public domain.
In addition to these factors, there are those that do not depend on the activities of the management of a particular company:
- The level of development and competitiveness in the market of goods and services.
- Natural and weather conditions.
- Customer solvency and the general economic situation in the country.
- Cost of related services.
- Foreign economic relations with other countries.
- Transportation conditions and freight costs.
It is also worth considering the force majeure situations that occur during each production process.
Analytical method of counting
This method is used in enterprises with a large assortment of manufactured goods. It is based on basic profitability, which is calculated by the following formula:
P = (P / C) * 100%, where P - profitability; P - profit received in the first year of the enterprise (base year); C is the cost of sales of products released in the base year.
Using this indicator, you can calculate the approximate amount of profit for the planned year:
P = Nt* P / 100%, where Nt - the volume of products planned for release in the planned year; P - basic profitability.
The data obtained are adjusted and adjusted for production, taking into account internal and external factors arising in the course of the company. This happens in several stages:
- Profitability assessment for the planned period of time.
- Adjustment of production volumes taking into account the arisen factors and real indicators.
- Calculation of net profit as a percentage of total revenue.
- Profit planning and sales profitability, taking into account changes made in the production process.
Often a multifactorial, or analytical, method is used as an additional test of the direct method or in combination with it. Profit planning by direct counting and analytical methods in aggregate is a mixed method, which makes it possible to obtain the most relevant and reliable data.
Direct counting method
One of the most popular methods in practice is the planning of enterprise profits by the direct account method, which is used both in the formation of a new enterprise and during the improvement or modernization of an existing one. Profit planning requires subtracting from the total amount of income such indicators as taxes, regular payments, production costs and other deductions necessary to keep the company afloat.
Planning for profit and profitability of an enterprise is calculated by the formula:
П = В - З, where П - profit, В - received income from sales; З - the totality of all the waste that was made during production: raw materials, commercial management, taxes, payment for work and services, payment of loans, etc.
In the future, revenue and total cost are calculated taking into account residual funds and products, passing from the end of the previous planning period to the beginning of a new one. In this case, profit planning by the direct account method is carried out according to the following formula:
P = P1 + P2 - P3, where P is the profit from the sale of goods and services; P1 - from the remnants of finished goods at the beginning of the period; P2 - from sales of new goods; P3 - from residual products at the end of the planning period.
Pros and Cons of a Direct Account
The advantage of this method is the accuracy and relevance of the data. A significant drawback is the difficulty in calculating: collecting all the necessary numbers takes a lot of time and requires painstaking attention.
This profit and profitability planning can only be applied to small enterprises that produce a limited number of product groups. If the production nomenclature has a large array of positions, this calculation option is not applicable: it does not take into account the profitability / loss-making of each product individually and the difference in the cost of their production.
Profit planning using the direct account method on the example of large-scale production gives inaccurate and irrelevant results. Let's say a company produces 50 clothing options from different materials and sewing complexity.Some models are in great demand, and their tailoring requires less effort and resources, while individual products are less popular, and their cost is much higher. This is an important point that must be taken into account when creating a business plan, because if you continue to issue unprofitable positions, this will further lead to the ruin of the company.
Graphical approach
For a good example and further consideration of the results obtained, network diagrams are used. Most often, in the form of figures, data obtained during the analysis are submitted.
The graphs clearly show the influence of individual factors on the overall financial condition of the organization.
Break-even point profitability forecasting method
This profit planning is based on the division of all production costs into two groups: temporary and permanent. These two indicators determine the success of the enterprise in material terms and help to outline a critical break-even point, after which the company begins to receive monetary benefits.
The first stage is the calculation of marginal profit. This is the amount of income excluding taxes and excises with the deduction of time spent. Then conditionally constant expenses are taken away from marginal profit. Thus, a value is formed beyond which it is possible to determine the payback or loss-making of the enterprise.
Break even - This is an indicator at which the company's activity goes to zero: there are no debts or net profit. Based on these data, the company creates its own base of financial stability, which allows to spend less resources, while increasing profit from sales. This is called the effect of production leverage, consisting in the fact that a change in the amount of sales revenue leads to even greater changes in profitability. This is due to the instability of constant-variable and variable costs: the lower the rate of conditionally constant spending, the less the effect of production leverage. If sales are steadily growing, the impact of leverage increases.
Break-even point example
Based on the above, we can derive the following formula:
Leverage Efficiency = Margin Profit / Profitability.
For example:
Sales income - 100 thousand rubles.
Variable expenses - 50 thousand rubles.
Permanent spending - 30 thousand rubles.
Profit - 20 thousand rubles.
- Margin Profit Percentage: (50/100) * 100% = 50;
- Break-even point calculation: (30: 50) * 100% = 60;
- Act operating lever: 50: 20 = 2.5. This coefficient suggests that a change in sales revenue by 1 unit entails a 2.5-fold change in profit.
Choosing the optimal counting method
The calculation methods proposed above make it possible to choose the best option, which will help to obtain the most reliable figures.
When choosing a method should be guided by a system of criteria compiled by experts of the enterprise (accountants, economists, administration and financiers). The maximum number of personnel should be involved in this issue, only in this case the most objective data can be obtained.
Benchmarks in choosing the best method
It is worth starting from such indicators:
- Ease in counting. The selected method should be simple and affordable to use. The time and resources spent on collecting and analyzing data should not exceed the economic efficiency of using the results in practice.
- Relevance. Profit planning should take into account the real factors of production. All objective points must be taken into account: not only those that have an impact in the current period, but also those that will prove themselves in the process of implementing the plan.
- Practicality. The choice of method should be correlated with the internal factors of the enterprise. The circulation of documentation, the level of qualifications of specialists and technical support should guarantee effectiveness from the application of the rules in practice.
- Data accuracy. The result obtained in the course of calculations should correspond to reality and be closest to market realities. Compliance with this criterion allows you to minimize the difference between the value of possible and real income.
This system of criteria is presented for illustrative purposes and can be changed and improved by specialists of the enterprise, who will be guided by individual priorities.
Having in hand all the necessary criteria, you can proceed directly to the selection of the method. To do this, you should evaluate all the methods presented above according to the main criteria, giving them a rating of 1 to 5. The option that collected the most points is considered the most profitable for use in a particular production.
Regardless of the chosen method of forecasting profitability, it should be borne in mind that these are just approximate data that require constant adjustments and updates, in accordance with new circumstances and changes in the market.
