Every entrepreneur knows what profit is and how to calculate it, because this is the main goal (or one of them) of any economic activity. However, when calculating the long-awaited banknotes, you may find that the actual amount differs significantly from the expected one. The reason often becomes various factors affecting the amount of profit. Their list, classification and degree of influence will be described later.
Briefly about the concept of "profit"
This term refers to the difference that is calculated by subtracting from the total income (revenue received from the sale of goods or services, fines and compensations made, interest and other income) costs incurred in order to acquire, store, transport and sell the company's product. What is profit, the following formula can more illustratively illustrate:
Profit = Revenues - Costs (expenses).
All indicators before calculations should be converted into monetary equivalent. There are several types of profit: accounting and economic, gross and net. There are several views on what profit is. The definition of its various types (accounting and economic, gross and net) is necessary for the analysis of the economic situation in the company. These concepts differ from each other, however, their value in any case is the most striking characteristic of the efficiency of the enterprise.
Profit Indicators
Knowing what profit is (the definition and formula are presented above), we can conclude that the resulting indicator will be absolute. At the same time, profitability exists - a relative expression of how intensively an enterprise operates and what is its level of profitability in relation to a certain base. A company is considered profitable when the amount of income received (revenue from the sale of goods or services) not only covers the costs of production and sales, but also forms a profit. This indicator is calculated by the ratio of net profit to the value of production assets:
Profitability (total) = Net profit / (Sum of fixed assets + Sum of material circulating assets) x 100%.
Other indicators of profit (profitability of products, personnel, sales, own assets) are calculated in a similar way. For example, the profitability indicator of products is found by dividing the profit by the total cost of the product:
Profitability (of products) = Net profit / Cost of production and sale of the product (cost) x 100%.
Most often, this indicator is used to conduct analytical calculations of on-farm value. This is necessary in order to control the profitability or loss-making of specific products, to introduce the production of new types of goods or to stop the production of unprofitable products.
Factors Affecting Profit
An integral part of the activities of any successful organization or enterprise is the strict accounting of the costs incurred and the income received. Based on these data, economists and accountants calculate a lot of indicators to reflect the dynamics of the development or degradation of the company. At the same time, they study the factors affecting the amount of profit, their structure and intensity of exposure.
Analyzing the data, experts evaluate the past activities of the enterprise and the state of affairs in the current period. The formation of profit is influenced by many interrelated factors that can manifest themselves in completely different ways. Some of them contribute to the growth of income, the effect of others can be described as negative. In addition, the negative impact of one of the categories can significantly reduce (or completely cross out) the positive result obtained due to other factors.
Classification of factors determining profit
Among economists, there are several theories on how to separate factors affecting the amount of profit, but most often resort to this classification:
- External
- Internal:
- non-manufacturing
- production.
In addition, all factors can also be extensive or intense. The first ones illustrate the extent to which and for how long productive resources are used (whether the number of employees and the value of fixed assets change, whether the duration of the shift changes). They also reflect the waste of materials, stocks and resources. An example is the production of defective products or the production of large amounts of waste.
The second - intensive - factors reflect how intensively the resources available to the enterprise are used. This category includes the use of new advanced technology, more efficient management of equipment, the involvement of personnel with the highest level of qualification (or activities aimed at improving the professionalism of their own employees).
What relates to production and non-production factors
Factors characterizing the composition, structure and application of the main components of production that take part in the process of generating profit are called production. This category includes the means and objects of labor, as well as the labor process itself.
Non-production should be considered those factors that do not directly affect the manufacture of a company's product. This is the procedure for the supply of inventory, the way products are sold, financial and economic work is carried out at the enterprise. The characteristics of the working and living conditions in which the employees of the organization are also related to non-production factors, since they affect the receipt of profit indirectly. However, despite this, their influence is significant.
External factors: list, essence and degree of influence on profit
The peculiarity of numerous external factors that can affect the profitability of the enterprise is that they do not depend on managers and staff. Among them should be highlighted:
- The demographic situation in the state.
- Availability and inflation rate.
- Market conditions.
- Political stability.
- The economic situation.
- Interest rates for a loan.
- The dynamics of solvent consumer demand.
- The price of imported components (parts, materials, components).
- Features of tax and credit policy in the state.
All these external factors (one or several at the same time) will inevitably affect the cost of production, the volume of its production or the number of products sold.
The specifics of internal factors on which profit depends
An increase in an organization’s profit may occur with an increase in cash receipts or as a result of cost reductions.
Internal factors reflect the production process and marketing organization. The most noticeable effect on the profit made by the enterprise is an increase or decrease in the volume of production and sale of goods. The higher these indicators, the more income and profit the organization will receive.
The next most important internal factors are the change in the cost and price of the product. The greater the difference between these indicators, the higher the profit a company can get.
Among other things, the profitability of production is influenced by the structure of manufactured and sold products. The organization is interested in producing as many profitable products as possible and reduce the share of unprofitable (or completely eliminate it).
Ways to reduce company costs
To reduce costs and increase profits, entrepreneurs can use several methods. First of all, experts review and analyze ways to reduce the cost of production, the process of transportation or sale.
The next one is the issue of staff support. If possible, cut various free privileges, bonuses, bonuses and incentive payments. However, the employer cannot reduce the rate or salary of employees. Also at the same level are all mandatory social benefits (sick leave, travel, vacation, maternity and others).
In an extreme case, the head is forced to resort to the dismissal of freelance and temporary employees, reviewing the staffing table and reducing the staff. However, he should carefully consider such steps, because the dismissal of workers will not lead to higher profits if the volume of output and sale of the product decreases.
What is tax payment optimization?
The company can save by reducing the tax amount that will be transferred to the budget. Of course, we are not talking about evasion and violation of the law. There are quite legitimate opportunities and loopholes that, when used correctly, can lead to increased profits.
Minimization of taxes does not mean a literal reduction in tax payments, rather, it means the increase in the financial resources of the enterprise, as a result of which special tax systems with various preferential terms come into force.
A completely legal and legal way of tax accounting, designed to increase profit margins and reduce paid taxes, is called tax planning.
Due to its effectiveness, today tax minimization is becoming an almost mandatory procedure for many enterprises. Against this background, conducting business on general terms, without using available tax benefits, can be called short-sighted and even wasteful.
Intangible factors
Despite the fact that some factors affecting the amount of profit of an enterprise are sometimes not amenable to control, the decisive role in achieving high income belongs to a properly built organizational system at the enterprise. The stage of the life cycle of the company, as well as the competence and professionalism of the managerial staff, largely determine how noticeable the influence of certain factors will be.
In practice, a quantitative assessment of the impact of a particular factor on profit indicators is not possible. Such a difficult factor to measure becomes, for example, the business reputation of the company. In fact, this is an impression of the enterprise, the way it looks in the eyes of its employees, customers and competitors. Business reputation is formed taking into account many aspects: creditworthiness, potential opportunities, product quality, level of service.
Thus, you can see how wide the range of factors affecting the profitability of the enterprise. However, the specialist applying the methods of economic analysis and guided by the current legislation can use various ways to reduce costs and increase company income.