The profit indicator is fundamental in determining the effectiveness of the enterprise, therefore, its analysis must be carried out in the most thorough manner. It is not enough for managers and managers to know whether profits have increased or decreased, compared to last year. To make positive management decisions, it is extremely important to understand what the changes are related to. Profit increased due to price increase? Or did the company manage to increase sales? Or maybe success is due to a successful product policy? A factor analysis of profit before tax will help answer all these questions .
Factor analysis breaks down changes in profit into several parts, depending on what they were due to. Today, it is customary to single out five main factors: a change in pricing policy, a change in sales volumes, changes in the structure of sales (in assortment), changes in costs and, finally, changes in the structure of expenses.
The biggest impact on profit is usually provided by a change in price, and factor analysis of profit makes it quite easy to determine the size of this effect. It is enough from the implementation of the current year (the price is multiplied by the volume) to subtract the implementation of the previous year in the volumes of the current (just multiply last year's prices by the current volumes). The resulting difference is usually positive, and will show the impact of changes in profit prices.
For the company, however, more significant and indicative is the increase in profits due to increasing sales volumes. Since inflation often influences profit growth, factor analysis of profits should separate it and determine the real merits of the company. To determine the effect of volumes, it is enough to multiply the profit of the last year by a special coefficient K1 minus one. The coefficient is calculated as the ratio of sales volumes of the current year in physical terms to the previous year. If sales volumes have fallen, the multiplier will be negative, which means that the effect on profit will also be negative.
The factor analysis of profit also attaches no less importance to changes in profit that have occurred due to changes in the range of products. For example, the most profitable goods sold better in the current year, while sales of the unprofitable were reduced. The effect is calculated as follows. You need to multiply last year’s profit by the difference of two factors. From coefficient K2, subtract the coefficient K1 calculated above. K2 is calculated as the ratio of sales in volumes of the current year and prices of the last year to sales of the last year (we considered the numerator when calculating the effect of the price).
Thus, we only need to identify the impact of changes in cost, and factor analysis of profit from sales it will be possible to finish. To calculate this effect, you need to subtract the cost of the current year from indicator S. Indicator S is calculated simply. Take the cost of last year and recalculate it taking into account the current sales volumes of each product. Thus, you exclude the influence of volumes and structure.
The last indicator, indicating the change in cost due to structural changes, is calculated in a rather complicated way and does not carry especially important information. You can simply subtract from the general indicator of the change in profit all the factors calculated above and get the so-called other conditions.
In fact, factor analysis of profits is not as difficult as it might seem at first glance. And the presence of special management programs greatly simplifies the process, so that you only need to enter the necessary numbers in pre-written formulas.