Profit margin is one of the central elements of operational analysis. This economic term is used in two meanings: marginal income and one of the sources of profit to cover fixed costs.
Instructions
Step 1
For the most effective planning and forecasting of the financial activities of the enterprise, the determination of the main results of economic activity, as well as an overview of the dependences of the sales volumes of the final product on the production costs, operational analysis is used. One of the main elements of this settlement system is the concept of marginal income.
Step 2
The term "profit margin" appears in economic theory in two ways. This is due to the original (English) origin of the word itself - marginal. Firstly, this word means "limit, ultimate", i.e. what is on the border. Secondly, marginal is a difference, a fluctuation, hence the use of the term in the meaning of "coverage amount" or "margin". In stock market terminology, margin is the difference in exchange rates; for an enterprise, it is that part of the remaining profit that is aimed at covering fixed costs.
Step 3
The marginal revenue of a business is the revenue generated by the sale of an additional unit of a product produced. The division of costs into fixed and variable costs depends on the specifics of each individual company. In general, fixed costs are rent for premises, payment of salaries, security, taxes, etc. Thus, the marginal income is one of the main components of the total profit of the enterprise. The higher the marginal income, the more compensation for fixed costs, the higher the company's net profit.
Step 4
The formula for determining the marginal income looks like this: MD = BH - PZ, where BH is the company's net income from the sale of products, PZ is a set of variable costs. There is also the concept of specific marginal income, namely per unit of goods sold: MD_ud = (BH - PZ) / V, where V is the volume of products sold.
Step 5
In operational analysis, there is a concept of the so-called break-even point. This is such a volume of sales of the company's products at which fixed costs are fully covered by the profit received. In this case, the income of the enterprise is zero. This means that the amount of marginal income equaled the sum of fixed costs.
Step 6
The break-even point is the most important indicator of the company's solvency, its financial balance. The higher the financial indicators above the break-even point, the better the company's solvency, and the excess is called the financial safety margin.
