For all, without exception, owners and managers of enterprises, organizations or companies, unprofitability is the worst word. This phenomenon indicates the inefficiency of entrepreneurial activity, which leads not only to a lack of profit, but also to debts.
What is the ROI and why is it important?
The profitability indicator is the most significant, as it illustrates the profitability of the organization. When analyzing it, specialists study the actual figures at the current moment and the dynamics of changes in the indicator for previous periods. The value determined by the ratio of net profit to total costs.
A profitable enterprise shows a positive indicator, that is, its profit exceeds expenses. Unprofitability of an enterprise is, in other words, its unprofitability. Actually unprofitable called value of the index is less than one.
Why analyze negative profitability?
Strictly speaking, the negative margin is called conditional, emphasizing the inefficiency of the enterprise. If during the analysis of economic indicators found unprofitable, this means that there are flaws in the production process, marketing or management strategy. The numerical value of negative profitability shows how difficult the situation is in the company, and also clearly illustrates the impossibility of further functioning of the organization in the usual mode (because if expenses exceed profits, the problem only worsens over time).
What is unprofitable enterprises in particular categories?
Total yield reduction can be triggered by the influence of one or more factors. To identify the "weak links" and find the intensity of their impact on the overall unprofitability of the enterprise, economists resorted to the calculation of indicators of return on assets, personnel, fixed assets, production, sales, as well as many other categories.
They are determined by replacing the amount of total expenditure in the denominator (income / total expenses) expenses on personnel, cost of production assets, cost of production.
What does low return on sales indicate?
The lack of profit from the sale of manufactured products indicates an error in the calculation of prices. Unprofitability arose because of the low price, which does not provide for the costs of the manufacture, transportation and advertising of goods.
Increasing the value of the negative profitability is proportional to the price level. If we are talking about an indicator of minus 20% or less, then the leader should seriously think about introducing innovations and radical measures. Otherwise, the business will have to close.
The same situation is observed in the calculation of the profitability of production, but the denominator are the costs and the sale of products in terms of money.
Not the last role in the activities of any organization is staff. More precisely, he makes the greatest contribution to financial success or the collapse of the enterprise. Staff profitability shows how paying off the cost of maintaining the workers and their jobs.
In the event of a disappointing and frankly poor performance leader forced to take action to reduce costs and increase employee productivity. Savings can be achieved by reducing payments (bonuses, bonuses, rewards) or by dismissing part of the state.
However, staff training, the introduction of strict discipline, improving the incentive system can fairly quickly increase the key performance indicators.
Unprofitable - it is an alarming signal for investors
By investing in the development of the enterprise, the investor assumes later get some profit. Under the terms of the agreement, he is provided with reliable information about the failure of management and financial problems of the owner of the organization.
Since unprofitability is a negative profit, the value of the company's shares will soon decrease greatly. Most experienced investors do not wait for the situation to worsen and withdraw funds from the project.
However, in some cases it makes sense to wait for the alignment and stabilization of stock prices: for example, at the time of unprofitability, which disappears while reducing waste and costs.