One of the key parameters for assessing the effectiveness of a business is the profitability indicator, as well as its ratio with the industry average level of profitability.
How to calculate the level of profitability
It is important to differentiate the indicator of profitability with revenue. If revenue simply reflects the total turnover of the company (it is calculated in rubles), then profitability is the efficiency of its activities (expressed in%). Any business that has brought profit at the end of the period under review can be called profitable. If there is a loss, the profitability will be negative.
In trading, the profitability of a product is calculated as the ratio of net profit to cost.
Profitability of goods (services) = net profit from sales (provision of services) / cost * 100%.
Return on sales (services) = net profit / revenue * 100%
Let's say a company sells women's clothing. She bought goods for 12 million rubles, sold - for 28 million rubles. At the same time, administrative and commercial expenses amounted to 5 million rubles. Thus, the profit amounted to 11 million rubles, and the profitability of goods - 11/12 * 100 = 91%.
The profitability of services is calculated in a similar way, in this case, the cost price does not take into account the purchase price of the goods, but, for example, the cost of purchasing tools, wages of workers, etc.
In assessing the profitability of sales, the company's net profit and turnover are taken into account. If we take the example of a clothing store as a basis, then it will be = 11/28 * 100% = 39.2%. Using this formula, it is desirable to evaluate each product group separately. For example, the profitability of sales of T-shirts, sneakers, bags, etc. This will allow us to highlight the most effective positions in the assortment, as well as those that need to be worked on to increase profitability.
Acceptable level of profitability by industry
There is no single acceptable rate of return; it varies from industry to industry. So, for example, in the mining industry, the profitability of sales is considered normal above 50%, and in the woodworking industry it does not reach 1%.
According to researchers, the average Russian profitability indicator is about 12%. However, this value in itself is practically meaningless if not compared with similar indicators of competitors' performance or industry average values.
Please note that if the profitability of your business deviates significantly from the industry average (by 10%), this increases the likelihood of a tax audit.
According to RIA-rating, the average return on sales by industry in 2013 were as follows:
- mining operations - 26.3%;
- chemical production - 18.3%;
- textile production - 2.8%;
- agriculture - 11.7%;
- construction - 6.7%;
- wholesale and retail trade - 8.2%;
- financial activities - 0.4% (2012, Rosstat);
- healthcare - 6.5% (2012, Rosstat).
In the service sector, a profitability of 15-20% is considered acceptable.
If you find that you are seriously lagging behind your competitors in terms of business efficiency, you need to work to increase the level of profitability. This task can be achieved through a competent marketing policy aimed at increasing the customer base and ensuring an increase in the turnover of goods, as well as by obtaining more favorable offers from suppliers of goods (or subcontractors).
