For all, without exception, owners and managers of enterprises, organizations or companies, unprofitability is the worst word. This phenomenon indicates the inefficiency of entrepreneurial activity, which leads not only to a lack of profit, but also to debts.
What is profitability and why is it important?
The profitability indicator is the most significant, as it illustrates the profitability of the organization. When analyzing it, specialists study the actual figures at the current moment and the dynamics of changes in the indicator for previous periods. The value is determined by the ratio of net profit to the amount of expenses.
A profitable enterprise shows a positive indicator, that is, its profit exceeds expenses. Unprofitability of an enterprise is, in other words, its unprofitability. In fact, the value of an indicator less than unity is called unprofitability.
Why analyze negative profitability?
Strictly speaking, negative profitability is called conditionally, emphasizing the inefficiency of the enterprise. If during the analysis of economic indicators found unprofitable, this means that there are flaws in the production process, marketing or management strategy. The numerical value of negative profitability shows how difficult the situation is in the company, and also clearly illustrates the impossibility of the further functioning of the organization in the usual mode (because if expenses exceed profits, the problem only worsens over time).
What is the unprofitability of the enterprise in certain categories?
A general decrease in profitability can be triggered by the influence of one or several factors. To identify the "weak links" and to determine the intensity of their impact on the overall unprofitability of the enterprise, economists resort to calculating the profitability of assets, personnel, fixed assets, products, sales, as well as many other categories.
They are determined by replacing the amount of total expenses in the denominator of the fraction (profit / total expenses) with staff costs, the cost of production assets, and the cost of production.
What does low return on sales indicate?
The lack of profit from the sale of manufactured products indicates an error in the calculation of prices. Unprofitability has arisen due to the low price, which does not provide for the costs of the manufacture, transportation and advertising of goods.
The increase in negative profitability is proportional to the price level. If we are talking about an indicator of minus 20% or less, then the leader should seriously think about introducing innovations and radical measures. Otherwise, the business will have to close.
The same situation is observed when calculating the profitability of production, but the denominator is the cost and sales of products in cash.
Not the last role in the activities of any organization is staff. More precisely, he makes the greatest contribution to financial success or the collapse of the enterprise. Profitability of personnel shows how much the costs of maintaining workers and their jobs pay off.
In the case of disappointing or frankly low indicators, the manager is forced to take measures to reduce costs or increase employee productivity. Savings can be achieved by reducing payments (bonuses, bonuses, rewards) or by dismissing part of the state.
At the same time, staff development, the introduction of strict discipline, and the improvement of the motivation system can quickly increase key indicators.
