# The formula for profitability of the main activity of the enterprise

Any enterprise in the process of economicactivity seeks to profit from its activities. The ideal formula for any business will be to get as much revenue as possible and spend a minimum of resources on it.

## What is used for evaluation?

To assess the performance of enterprises usea variety of economic and financial indicators: the cost of products, the coefficient of profitability of production, margin sales, cash turnover, capital flow, and many others. For each such indicator has its own calculation method, for example, to determine profitability, the formula for profitability of the main activity of the enterprise is used.

## Profitability of production and enterprise

The term "profitability" has German rootsand means "profitability." Using the assessment of profitability, it is possible to draw conclusions about the effectiveness of the use of cash in the enterprise. But how to calculate the profitability of production?

This indicator determines the profit thatreceived the manufacturer per unit of its costs. That is, for example, if the profitability is 20%, then the enterprise received 20 rubles of profit for each ruble, which was expended on the process of producing goods or providing services. The lower the profitability, the less the enterprise earns from one conventional unit of output. These theses confirm the formula of profitability of the main activity of the enterprise.

Profitability indicators are also calledindicators of profitability. In fact, you can determine the effectiveness and quality of management in the enterprise, calculating the profitability of the main activity of the enterprise. The formula for calculation is given in the article. If the resources of the enterprise are not used rationally, then the profitability will decrease. And with effective and economical use of raw materials and other values, it will grow.

The formula for profitability of production will helpto find out the level of profitability by which you can judge whether it is profitable to engage in such activities or whether you need to redirect production to another channel. In other words, with the help of mathematics, one can justify the expediency or disadvantage of conducting one or another type of activity.

## Calculation of profitability

The formula for profitability of the main activity of the enterprise, which will show the result in the form of interest, is as follows:

RBasic. = ((Profit from operating activities) / (Cost of production + Total production costs + Administrative costs)) * 100%,

Where:

• Profit from the main activity = (Revenues of the enterprise by main type of activity) - (Cost of production + General production expenses + Administrative expenses).
• The cost of production is a direct costfor the conduct of activities (wages and salaries for workers who directly participate in the production process, the costs of the purchase and delivery of raw materials, materials that are expended in production, etc.).
• General production costs - include costsfor electricity, utilities, paper, cleaning services, staff salaries, which are not directly related to the production process, but are engaged in servicing business processes (secretaries, technicians, cleaners, security guards and others), as well as other costs that can not be attributed to direct.
• Administrative costs - maintenance costsadministrative and managerial staff, holding meetings and meetings, encouraging employees for high achievements, holding sports events and other events, traveling to various conferences for directors, as well as other costs incurred by the company in organizing the production process.

In order to see the coefficient, The formula for profitability of the main activity of the enterprise is calculated without multiplying by 100%.

In principle, this calculation is suitable for other types of profitability, only with some changes. For example, the formula for the profitability of production is as follows:

Retc. = ((Profit from the sale of goods) / (Cost of production of goods + General production expenses for the production of goods + Administrative costs for the production of goods)) * 100%.

## What level of profitability is considered normal?

The first step is to consider the basic valuesprofitability index. The profitability of the main activity, the formula for calculating which is given above, can assume very different values. If the coefficient is below zero, it shows that the company spends money on the production of goods or services more than it earns on their sale.

A coefficient of 0 indicates a breakeven point. This means that the enterprise does not receive profit, but also does not incur financial losses from its activities.

If the profitability is higher than 0, then the enterprise works itself into profit.

It should be taken into account that in different spheres of business there isits own acceptable profitability of its core business, the calculation formula of which speaks about it. There are industries in which it is necessary to cover also the risks with which the producer meets in various directions of his activity.

Russia is no exception.At enterprises that engage in different activities, profitability indicators can be radically different. In this case, not always an enterprise with a lower profitability will be less successful. There are a number of reasons for this, related to the turnover of capital and other features of the functioning of enterprises in various sectors of the economy.

## Normal profitability in the field of building materials and other production

Thus, in the branches of constructionmaterials, as well as those that have a high transportation potential to other countries, the average profitability indicators are at the following level:

• operation of oil and gas pipelines (80-90%);
• production of cement products (80-85%);
• production of fertilizers (80-85%);
• production and processing of non-ferrous metals (60-65%);
• production of rolled products (35-40%).

## Normal profitability in the banking sector

In the sphere of banking services and for financial institutions the following indicators are observed in the Russian Federation:

• clearing services (65-70%);
• maintenance of trade in financial markets (55-60%);
• maintenance of registers in the securities market (40-45%).

## The normal profitability of goods consumed by man

The production of goods that are consumed by the population has such profitability indicators:

• manufacturing of tobacco products (40-42%);
• brewing (25-30%);
• production of household appliances (20-25%).

## The pitfalls of the profitability index

Despite the fact that the formula for profitability of the main activity of the enterprise is quite simple and understandable, the final indicator can not be looked at straight.

There are many methods of analyzing profitability, which characterizes a wide range of different types of its indicators.

First of all, it is important to evaluate and compare the volumessales of different periods, as well as trace the level of profitability of those periods. It often happens when a good and promising business becomes unprofitable precisely because of the wrong approach to estimating the necessary volumes of production and sales of goods and services.

For example, the manufacturer of any product wanted to increase the profit of the enterprise not by reducing the level of production costs, but by increasing the volume of output.

The formula of profitability of production atThis will show at the output that profitability can fall significantly or even be negative. What is the reason for this? There are a lot of factors. There is always the probability of losing markets or their volume failure. Relations with sellers may deteriorate, or simply the output volume of products is not needed by the market, since demand is limited. In simple words, if there is no one to sell the goods, then why should not it be produced. In the case of excess production, the goods will simply lie in warehouses and deteriorate.

Also it is necessary to consider speed of turnoverof capital. For the first example, you need to analyze the time between the initial purchase of raw materials and the point at which the money was received for the products produced. This will be a complete production cycle. The profitability of the production of 1 commodity can be, for example, 50%. If there is a period of turnover of production is large, and also the volume of production is limited, then real profits can be too small to pay all current expenses. That is, a mark of profitability of 50% may not at all indicate the success of the enterprise, but will simply characterize the specifics of the industry and the methods of production.

## How to use the indicator of profitability of production?

Of course, the profitability of production isOne of the most important indicators by which it is possible to analyze the effectiveness of the enterprise and to draw any conclusions about the production process itself.

Analyzing the activities of any enterprise willit is not enough just to know how to calculate the profitability of the main activity, you need to remember about other indicators, as well as a variety of methods of economic research. You can not extract profitability from the whole system of indicators in which it is included. This financial stability, and liquidity, and solvency, etc. In addition, it is necessary to conduct a vertical and horizontal analysis of the balance sheet of the company, to use financial indicators, such as capital turnover, the movement of assets.

Only in this case, it is possible to fully evaluate the profitability index, determine the prerequisites of such a level and the ways of its effective increase.