The management of any company is obliged to monitor the performance indicators of the organization of financial and economic activities. The net profit of the enterprise and its stability depend on this. An important stage in assessing the effectiveness of its work is the profitability of working capital. This indicator is necessarily investigated by analysts.
Based on the data obtained, measures are being developed to improve the financial and economic situation at the enterprise. Working capital involved in the production of goods. Therefore, without their evaluation, the company cannot organize the process of manufacturing its products correctly. The profitability indicator allows analysts and company management to consider the impact of current assets on the profit margin of the reporting period.
Working capital concept
Working capital of the enterprise consists of resources that are fully consumed in one cycle. They relate to cost. Their turnover period is short-term (not exceeding 12 months). Such assets include raw materials, materials, semi-finished products, fuel, as well as receivables and short-term investments. Their number is subject to rationing.
The return on working capital will be the greater, the less resources a company spends to increase profits. However, the number of such assets should be sufficient to ensure continuous production activities.
Therefore, the financial service is working to reduce the composition of working capital of receivables, work in progress, inventories. In order to develop the right measures to improve profitability, it is necessary to conduct a comprehensive in-depth analysis.
Profitability concept
Profitability indicators in financial and economic analysis allow us to evaluate the effectiveness of the use of certain resources, their impact on profit. Indeed, in order to obtain a positive financial result in the reporting period, production must be organized in such a way that the funds are directed economically into circulation.
But, in turn, the lack of resources leads to disruptions, production downtimes. It also negatively affects profits. The profitability ratio of working capital reflects the effectiveness of their use in the manufacturing process. When conducting an analysis, this coefficient should be considered in dynamics over several periods. It is also possible to compare it with similar indicators of competing enterprises.
Calculation formula
Return on current assets, the formula of which is used in financial analysis, is quite simple. To understand how to interpret the result obtained during the study, it is necessary to understand the essence of this calculation. The formula for the profitability of working capital is as follows:
- ROS = PE / OS * 100, where PE is net profit, OS is the average annual amount of working capital .
The data for the calculation are presented in the form of No. 1 and 2 of the financial statements. Working capital is a line of 1200 balance. Net profit is shown in line 2400 of OPiU.
If the analysis found that the profitability is greater than 0, then the use of current assets is effective. The company through its activities makes a profit. A negative result indicates an incorrect organization of production. Resources are used inefficiently.
Calculation Example
Return on working capital, the formula of which was considered above, is studied in dynamics. The result of the calculation is presented in the form of a coefficient or percent. The second option is preferable. For the correct analysis of this indicator, the calculation should be considered as an example.
Suppose, in the previous period, the average annual value of current assets on the balance sheet amounted to 10 million rubles, and in the reporting year - 12.5 million rubles. At the same time, the company received a net profit of 2.5 million rubles. both in the past and in the current period. Profitability is calculated according to the above formula:
- Ros1 = 2.5 / 10 * 100 = 25%.
- Ros2 = 2.5 / 12.5 * 100 = 20%.
In the analyzed period, the indicator was positive. But the dynamics speak of a decrease in profitability. The increase in the number of current assets was the reason. Therefore, the governing bodies of the company should consider the structure of the balance sheet and determine the constraints on the development. Activities should be aimed at reducing the number of current assets.
Normative
In addition to considering the dynamics of the indicator, it should be compared with the normative value. For each industry, he has his own. This is due to the material consumption of production. In industry, it is high. Indeed, for the manufacture of new products significant costs of raw materials, energy, etc. are required. The profitability ratio of working capital in this case rarely exceeds 0.2.
For new enterprises, a zero indicator value is considered acceptable. But for trading companies, depending on the specifics of the activity, the norm is considered if the coefficient is in the range from 0 to 0.8. In this case, the influence is mainly due to the system of settlements with debtors. Material costs are minimal, so they do not have a big impact on profitability.
Asset turnover
Working capital - this is the most liquid resources of the company. Therefore, their number should be sufficient for timely settlement with creditors. But at the same time, movable property should not accumulate and settle in stocks, receivables. Therefore, the speed of one revolution plays an important role.
This is the time during which a certain article or the entire set of current assets go through all stages of production, turns into a monetary form.
This metric also affects profitability. The faster the turnover, the more profit the company receives. Therefore, governing bodies are interested in every possible way to improve this indicator.
Profitability and turnover
The profitability of fixed assets depends on the speed of turnover. To understand this relationship, you should consider the formula for calculating this indicator. It looks like this:
- ROS = RR * Cob, where: RR is the profitability of sales, Cob is the turnover ratio of current assets.
The turnover ratio is calculated by the formula:
- Cob = BP / OS, where BP is the revenue from sales.
The profitability of sales means the ratio of revenue from sales to the cost of goods or services. This coefficient characterizes the efficiency of the operating activities of the company as a whole.
Break-even calculation
Performing an analysis of the profitability of working capital, get a whole set of data on the organization of financial and economic activities of the company. Based on them, planning is carried out.
Initially, it is required to calculate the breakeven level. This is the feature that separates the profitability of the enterprise from its loss-making. At this point, the resources spent on net profit become equal to it. The company does not receive any profit or loss.
When considering the financial statements , the break-even point is determined upon receipt of net profit in the amount of 0 rubles. This allows you to plan the minimum necessary income from sales, at which production will be break-even. From here, the minimum amount of costs is calculated (including working capital).
Profitability Factors
The rate of return on working capital is affected by many factors. They can be external and internal. To determine the profitability of working capital in the planning period, company management must take them into account.
External factors cannot be influenced, but it is possible to foresee their change. These include the cost of raw materials, labor and fuel, seasonal fluctuations in demand and prices for competitive products. Also, external factors are ranked as external factors on which profitability depends.
Internal paths of influence are available to management. Therefore, when planning activities to improve the efficiency of the enterprise, they are given special attention. Internal factors include labor productivity, organization of the production process, management approaches, and more.
Thanks to the competent, well-thought-out principles of conducting the company's operations, it is possible to increase profits and reduce costs.
Ways to Improve Profitability
There are three main areas that can improve the profitability of working capital. Based on a comprehensive analysis of the company’s activities, decisions are made on the implementation of certain measures to improve production efficiency. These include acceleration of sales, deliberate reduction in the number of working capital, changes in product prices.
The acceleration of trade should mean a reduction in the period of the entire cycle. Having studied each of its stages, one can determine the constraining factors. By eliminating them, the company is able to accelerate the turnover of funds. At the same time, certain resources are released that can be used to improve product quality and expand production.
The decrease in the number of current assets should be clearly calculated. Lack of funds leads to production downtime, reduced solvency, investment rating and stability. All actions in this direction should be clearly calculated. Price changes should be made taking into account market conditions.
Profitability Measures
There are a number of basic measures that can be resorted to to increase the efficiency of the use of working capital. To reduce the time period when materials are converted into cash, a company may pay special attention to those goods that are in great demand.
It will also be advisable to increase the assortment, reduce inventory in the warehouse, and work to improve product quality. An important role is played by a competent advertising campaign.
Return on working capital increases with proper rationing. The introduction of materials with improved qualities, scientific development is also of great importance.
Changes in prices also have a huge impact on profits. At a constant cost price increase of goods or services will be appropriate in the absence of competition. If the market is filled with various substitutes and similar products, you must either reduce the cost (not to the detriment of quality), or reduce prices as much as possible.
Acquaintance with such an indicator as the profitability of working capital, allows a competent assessment of the effectiveness of production resources. Based on the results of the study, planning is carried out, ways to improve the organization of turnover are found. This leads to the rational use of resources, increasing the company's net profit.