“Profit” is probably the first association that comes to mind to the word “business “. All entrepreneurs tend to get it and increase it. Many believe that the presence of profits confirms the business success of the company. However, this is not a true statement. Why profit is not an indicator of business success, we will tell in this article.
What is profit?
Quite often the terms “revenue”, ” income ” and ” profit ” are considered synonymous, although these are different concepts. Revenue is money that comes from selling goods, works and services. Income is all receipts of cash and other valuables in a company for a certain period. The company ‘s profit reflects the final financial result of its activities.
How to get more profit is interested in every businessman who is keen on his business. By the reference, we speak about 10 things that will help increase the company’s profit and do not require large expenditures.
There are different profit classifications: by the nature of the accounting, the main types of activity, the composition of the elements, relative to taxation, the level of inflation, the formation period, and so on.
For example, the composition of the elements are:
- Gross profit, which is calculated as the difference between revenue from sales and cost;
- Profit before taxation, which is determined by subtracting the sum of all enterprise costs from the total of all revenues;
- Net profit is profit after tax.
It can be used by the owners to pay dividends, bonuses to employees, in order to increase the authorized capital or develop the business.
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Performance indicators of the company
In general, efficiency is the ratio of the result obtained from the resources spent on achieving it.
You can view profit as an indicator of the company’s effectiveness because its availability means that the amount of revenue exceeds total costs. All these indicators are absolute, therefore it is impossible to assess the overall efficiency of the company, based only on them. To do this, many other indicators are used that characterize the various aspects of the activity.
- The profitability of sales reflects how much profit in each ruble proceeds;
- The asset turnover ratio reflects how much revenue is accounted for by the ruble of their average annual value;
- The current liquidity ratio allows one to assess how much a company is able to repay short-term liabilities solely from current assets;
- The financial stability ratio shows the share of funding sources that the organization uses for more than a year;
- The coefficient of financial independence reflects the share of equity in the total amount of capital, showing how the organization is independent of creditors;
- Financial leverage, which is calculated as the ratio of borrowed capital to equity, characterizes the level of sustainability of the company;
- The payback period of capital investments demonstrates how long it takes for the profit received to compensate for the costs incurred.
The efficiency of the use of labor resources
The productivity of labor is characterized by:
- Production – the volume of output that one worker produces per unit of time;
- Labor – the amount of time that an employee spends on the production of 1 unit of production.
Factors of business success
The business success is influenced by both internal and external factors. To take them into account, you need to act step-by-step:
- Conduct an analysis of the external environment in which the company operates or plans to operate;
- Formulate the mission of the company, which will be the benchmark for the activities. Define the goals and objectives for the implementation of the strategic plan;
- Develop a plan for the sale of goods, works or services;
- Carry out constant monitoring and adjust the company’s strategy in response to changes in the external environment and market conditions.
How to plan the efficiency of a company that has not yet started its work? Do not delude yourself and assume that you can compare all the criteria for the success of the company in advance and run a knowingly profitable business. If you are still looking for a worthy idea, creating a business plan will help you. But he does not guarantee that in reality, the efficiency of the company will match your calculations. But the business plan will allow you to quickly understand that something is going wrong, and, if necessary, in time to change the course.
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An objective assessment of the effectiveness of a company that is already making a profit is more real. Be sure to conduct this assessment regularly to understand what is happening with your company now, and also to influence what will happen to it in the near future. A sober view of the situation will never hurt.
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Now the factors that influence the business success are not a secret for you. Keep them in mind when planning a job or evaluating a company, and get more profit in less time!