In stock exchange, banking and trade, the concept of "margin" is widely used. It is based on the idea of / u200b / u200bthe difference between the selling price and the cost of production. In short, marginality is the profitability of sales. This indicator determines the profitability of the enterprise. High marginality testifies to the financial success of the company.
Margin analysis and its purpose
Margin analysis is also called break-even analysis. Within the framework of this analytical approach, the concept of "marginal income" is distinguished, which is calculated as the difference between the volume of proceeds and variable costs for their totality as a whole for the enterprise.
One of the functions of margin analysis is to provide an objective assessment of the state and level of reserves and the extent to which they are used in production. On the basis of this analysis, methods of mobilizing reserves and the possibility of their financial support are being developed.
Margin income concept
The economic meaning of marginal income is that it makes it possible to cover fixed costs and allows you to form a net profit from the activities of the enterprise. Marginal income is defined as the marginal profit that an enterprise can receive from the production and sale of each type of product.
The concept of marginal income fits well with the system of management and cost accounting methods. The essence of this system is that only direct costs are attributed to the cost price. And overhead costs, which do not directly depend on the volume of sales, are not included in the cost price, periodically written off to the financial result. According to the concept, the most accurate calculation is not the one that includes all the costs incurred after labor-intensive calculations and cost allocation, but the one that includes the costs that ensure the release of a specific product.
In the practice of the enterprise, situations often arise when the range of products produced includes products with low and even negative profitability at cost, but with a positive marginal income. Products of this type cover the variable costs associated with their production and some of the fixed costs.
An in-depth marginal analysis of the efficiency of product output demonstrates that excluding a product that has a negative profitability in terms of cost from production may not be justified. Often, such a decision leads to paradoxical results, for example, to a decrease in the company's profits.
The following indicators are often used in margin analysis:
- gross income ratio;
- margin income ratio;
- coefficient of change in gross sales;
- profitability of sales.
Product margin
Product margin can be defined as the difference between the total profit from the sale of a product and variable costs:
Margin = Total Sales Profit - Variable Costs.
The marginality formula allows you to calculate the indicator by dividing fixed and variable costs. Fixed costs remain even if production is discontinued. These costs include:
- repayment of credit obligations;
- rental fees;
- some tax payments;
- the salary of employees of the accounting department, personnel department, service personnel.
If the contribution to cover is equal to the sum of fixed costs, they say that the break-even point has been reached. In it, the volume of sales of goods is such that the company can fully recoup all the costs of manufacturing the product, not counting on making a profit.
Calculations of the main coefficients in the framework of margin analysis
one. The calculation of the margin income ratio is the ratio of such income to revenue:
KMD = (Revenue - Variable Costs) / Revenue;
This ratio shows what is the share in the revenue that goes to ensure profit and cover fixed costs. The growth of the indicator is taken into account as a positive factor. You can increase the ratio by raising selling prices or by reducing variable costs.
2. The coefficient of change in gross sales shows how the volume of gross sales for the current period changes in relation to the amount of gross sales of the previous period:
KVP = (Revenue for the current period - Revenue for the previous period) / Revenue for the previous period;
It should be borne in mind that the inflationary component contained in the indicator can introduce certain distortions in the obtained value.
3. Ratio of gross margin (gross income). It is the difference between the company's revenue and variable costs.
KVD = Revenue - Costs;
This indicator allows you to assess the profitability of sales of an enterprise. Gross income is intended to cover costs that depend on the overall management of the enterprise and the sale of finished products. Gross income provides the enterprise with profit.
It should be remembered that the term “gross margin” is understood differently in the European and Russian accounting systems. In the context of Russian economic reality, gross margin is understood as a calculated indicator that reflects the company's contribution to resolving issues related to income generation and cost coverage. This value alone cannot provide an idea of the company's financial condition.
In the European accounting system, gross margin is the percentage of revenues that are generated from sales. This takes into account the income that remains in the company after taking into account the direct costs going to the production of products to be sold. In other words, in the Russian economy, the gross margin means profit, while in Europe this indicator is calculated as a percentage.
How to increase marginality?
The methods for increasing the level of marginality are similar to the methods for increasing the level of profit or income. These should include:
- participation in tenders;
- increase in production output;
- distribution of fixed costs between significant volumes of products;
- optimization of the use of raw materials;
- search for new market sectors;
- innovation policy in the field of advertising.
Features of margin analysis
Very often, marketing strategies are built on the analysis of the marginality indicator. Margin serves as one of the central factors in forecasting profitability, developing pricing policy and profitability of marketing activities. In the conditions of Russia, margin profit is often referred to as gross profit. One way or another, but it is defined as the difference between the profit from the sale of a product and the cost of the production process.
Another name for the concept under consideration is the amount of coverage, which is defined as the share of revenue that goes directly to the formation of profits, as well as to cover costs. The main idea is that the increase in the profit of a commercial enterprise is directly and directly dependent on the rate of recovery of costs for production needs.
The marginality is usually calculated per unit of product. This approach allows us to understand whether it makes sense to expect an increase in profits due to the release of additional units of goods. The calculated margin profit indicator is not considered as a general characteristic of the economic structure, although it makes it possible to determine profitable and unprofitable types of products in terms of the marginal profit from their production and sale.
It should be remembered that the formulas for calculating marginality may differ somewhat depending on the range of products manufactured by the enterprise. A differentiated approach to calculations allows you to find out which type of product brings the most profit to the company and, therefore, to abandon the cost of resources for the manufacture of goods, the income from the sale of which is small or completely absent.
Marginal profit indicators also allow you to decide on the volume of production of a particular product. This issue is relevant primarily for those types of goods, in the manufacture of which the same type of technologies and homogeneous materials are used.
When doing business in the foreign exchange market, the term "free margin" is often used. In the context of currency trading, this concept is considered as the difference between assets and collateral. Free margin - the amount of funds in the account that are not related to obligations. An exchange speculator can freely dispose of these funds when conducting transactions (for example, to open positions).
The concepts of "margin" and "marginality" are used to effectively conduct business processes. The analysis of marginality and related indicators is recommended to be carried out before making responsible decisions in the field of the company's marketing policy. Management ignoring these concepts will have difficulty making marketing decisions. By identifying the parameters associated with marginality, the goal is to calculate the indicators of sales growth and determine the direction of movement of the released goods. This economic category is irreplaceable in banking, insurance and trade.
