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Threshold of profitability. Margin of financial strength

When conducting an analysis financial activities and economic condition of any firm, one of the indicators that allows you to do this is the threshold of profitability.

The concept of the threshold of profitability

The indicator at which the proceeds received from sales with the smallest volume of sales of the enterprise covers all production costs, as well as all expenses for the sale of products, is called the profitability threshold. The profit margin will then be zero.

In other words, this variable determines how much of a product must be sold at a certain price in order to ensure profitability at which the firm will not incur losses.

Often, this indicator is also called the critical point, critical production volume or break-even point.

It should be clarified that if the revenue exceeds the profitability threshold, an increase in profits will begin.

Thus, in the case of a set price for a product, it must be sold in quantities that exceed the break-even point.

The threshold rate of return must be considered from different angles:

Its value is intended to characterize the state of the enterprise, when it is still able to function without making a profit.
The organization's leadership regarding this indicator will be able to plan the volume of production to increase profitability.

Influencing factors

Factors influencing the value of the threshold rate of return:

revenue received from the sale of a unit of a good or service;
fixed costs;
variable costs;

If any of these indicators fluctuate, the threshold of profitability will decrease or increase.

For a more complete understanding of the significance of these factors, it is necessary to consider the concept of variable and fixed costs in more detail.

Fixed costs (conditionally fixed) are the costs of the company that do not depend on the volume of production for a specific period and remain relatively unchanged for a separate reporting period.

rent for premises;
deductions for depreciation;
utilities (water supply, lighting, heating);
funds for issuance wages employees of the organization's management apparatus;
insurance payments;
payment of interest on loans;
communication costs and so on.

The peculiarity of these costs is that their organization is obliged to pay in any case, regardless of whether it is in profit or loss.

Reducing these costs is very difficult, unlike variables.

Variable costs are the costs of an enterprise that vary in direct proportion to the volume of output or services produced.

In the balance sheet of each enterprise there is such an item as "Raw materials and materials". It reflects the cost of all the funds needed by the organization for the production of products.

Funds intended for remuneration of employees who are directly involved in the production of products.
Fare.
Funds for the purchase of raw materials and supplies.
Payment for fuel and energy required for production.
Taxes calculated from the financial result (profit tax) and others.

Formulas for calculating the threshold rate of return

The first formula: Vyrtb \u003d Zpost + Zper, where:

Vyrtb - revenue at the break-even point;
Zpost - fixed costs;
Zper - variable costs;

Fixed costs are also called gross margin, which is equal to the difference between revenue and variable costs.
The threshold of profitability of each organization can be calculated in two ways:

AT money equivalent: PRden=Vyr*Zpost/(Vyr-Zpost), where:

PRden - the threshold of profitability in terms of money;
Vyr - total revenue;
Zpost - fixed costs;
Zper - variable costs;

In kind: PRnat=Zpost/(C-ZSper), where:

PRnat - the threshold rate of profitability in physical terms;
Zpost - fixed costs;
ZSper - medium variable costs(per unit of product or service);
P - the cost of a unit of production or service;

In order to build this graph, you need to calculate the profitability threshold indicator for several production volumes and mark these points on the plane, and then draw a curve or straight line connecting them through them.

Calculation of threshold rate of return in Excel

In this program, it is incredibly convenient to carry out calculation operations.

For this you need:

In the first column, enter data on several sales or production volumes.
In the second column, note the fixed costs corresponding to these volumes.
The same must be done in the third column, only for variable costs.
In a separate cell, you must specify the cost per unit of product or service.
In the last column, the formula for calculating the threshold of profitability is written and stretched across the entire column.

Based on this table in Excel, you can make a graph.

An example of calculating the profitability threshold

Condition: the company sells goods in the amount of 110 units at a price of 510 rubles. The amount of variable costs is 365 rubles, fixed costs per unit of production - 115 rubles. It is necessary to calculate the threshold rate of return.

Calculation in monetary terms:

Zpost \u003d 115 * 110 \u003d 12650 rubles
Zper=365*110=40150 rubles
Vyr \u003d 510 * 110 \u003d 56100 rubles
PRden \u003d (56100 * 12650) / (56100-40150) \u003d 44493.1 rubles

Thus, the organization will remain in the black if its products or services are sold for a total amount that will be higher than 44,493.1 rubles.

In other words, in the case of sales of products for a given amount, the company will be at the break-even point.

Calculation in kind:

PRnat=12650/(510-365)=87 pieces

Consequently, the company will be able to make a profit when selling products over 87 pieces.

Enterprise profitability indicators

In order to understand how effective the activity of the enterprise is, along with the value of the threshold of profitability, it is necessary to calculate the main profitability ratios of the organization.

Profitability indicators characterize the ability of an enterprise to generate a return on invested capital.

The following variables are distinguished:

Profitability ratio of all assets. He talks about how many rubles of net profit the company extracts for the ruble of capital invested in the business. Kra \u003d PE / KAPsr, where: Kra - the desired coefficient; PE - net profit; KAPsr - the amount of assets at the end and beginning of the year, divided in half.

Return on equity ratio. It characterizes the investment attractiveness of the business and shows how many rubles per ruble of funds invested by shareholders. Krsk \u003d PE / SKsr, where: Krsk - the desired coefficient; PE - net profit; SKav - the amount of equity at the end and beginning of the year, divided in half.

Return on current assets. It indicates the efficiency of the use of current assets and operating activities. Krta \u003d PE / TAav, where: Krta - the desired coefficient; PE - net profit; TAav - the sum of current assets at the end and beginning of the year, divided in half.

Return on long-term assets. It shows how effectively non-current assets are used in general and mainly fixed assets. In addition, the indicator characterizes the investment activity of the enterprise. Krda \u003d PE / DAsr, where: Krda - the desired coefficient; PE - net profit; DAav - the amount of non-current assets at the end and beginning of the year, divided in half.

Return on sales ratio. It points to efficiency marketing activities and characterizes the demand for the company's products. Krp \u003d PE / Vyr, where:Крп - the desired coefficient; PE - net profit; Vyr - revenue.

The profitability ratio of the production cost. It shows how effectively the company is organized and in demand, that is, how many rubles of net profit received are accounted for by one ruble of costs invested in production. Krps \u003d PE / Ss, where: Krps - the desired coefficient; PE - net profit; SS - cost.

Thus, it is necessary to conclude that it is not at all difficult to calculate the profitability threshold indicator and analyze with its help certain economic aspects of the enterprise's activities.

However, his role is extremely important. And in the case of an analysis of the economic state with the help of the main profitability ratios, it is possible to fully assess the feasibility of producing goods and services.

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Issues discussed in the material:

What is the financial threshold of profitability
What is the benefit of the financial threshold of profitability indicator
How to calculate the threshold of profitability and the margin of financial safety of the company
How to lower the threshold of profitability

One of the responsibilities of enterprise managers is to regularly review the effectiveness of the use of company assets. Thus, it is possible to understand what expenses can be avoided, which ones should be increased, whether it is necessary to automate manual labor, to what extent it is possible to increase the profitability of the company. For such an analysis, a number of indicators are used, including the financial threshold for the profitability of an enterprise - we will talk about it in more detail.

The financial threshold of profitability: what is it and what factors affect it

Profitability indicates the effectiveness of the use of labor, economic, material, natural resources.

The threshold of profitability is called the volume of sales, due to which the company manages to cover the costs of production, without receiving profit from sales. In other words, we are talking about the so-called "work to zero".

In trading companies, profitability is usually expressed in specific numbers, comparing profits with capital investments. A business can be considered profitable if, according to the results of the reporting year, the company is in the "plus".

There are also other names for the financial threshold of profitability: critical point, critical production volume, break-even point.

The value of this indicator is influenced by a number of factors:

income from the sale of a unit of goods/services;
fixed costs;
variable expenses.

The fluctuation of any of the listed indicators directly affects the threshold of profitability - it decreases or increases. But in order to better understand the significance of these factors, you need to analyze them in more detail.

So, fixed costs (conditionally fixed) are company costs that are not related to the volume of production for a certain period, so they remain relatively unchanged for reporting period. This category of expenses includes:

rent;
deductions for depreciation;
utility costs (water supply, electricity, heating);
salary of employees included in the management apparatus of the organization;
insurance premiums;
interest on loans;
communication costs, etc.

These costs differ from others in that the company pays them regardless of the level of sales. Unlike variable costs, they are difficult to reduce.

Variable costs - the costs of the enterprise, changing in accordance with the volume of production / provision of services. The balance sheet of any company contains the item "Raw materials and materials", which fixes the cost of all means for the manufacture of goods. These costs include:

salary of employees involved in the production of goods;
fare;
funds for the purchase of raw materials, materials;
payment for fuel, energy required for production;
taxes calculated on sales (profit tax), etc.

Usefulness of the financial threshold of profitability as an indicator

The goal of any business is to maximize profits and reduce costs. The profitability of the organization is impossible without the profitability of its activities, in other words, the proceeds from the sale of goods must cover all costs.

The calculation of the threshold of profitability and the margin of financial strength is necessary for management in order to understand how much goods need to be manufactured and sold, fully recouping the costs. Based on these calculated data, the manager plans the output and selling prices, then he can get exactly the profit that the company needs. Thanks to the margin of financial strength, it is possible to assess how much the company has gone from the break-even point towards profit. The higher this reserve, the better the company is prepared for adverse economic situations.

Let’s say a company experiences an unexpected disruption or a noticeable deterioration external environment. With a large margin of safety, the enterprise is more likely to remain in the profit zone or suffer less losses than if it is close to the loss zone.

All of the above is most relevant for enterprises:

Beginning their activities. Before opening a company, it is important to analyze the financial threshold of profitability. This is necessary to assess the viability of the project, the cost structure and choose the most competent pricing strategy.
Planning to launch a new product line. Before this step, you need to understand how much the fixed and variable costs of the company will increase in order to set suitable prices.
Deciding to automate some processes. This leads to an increase in fixed and a decrease in variable costs associated with manual labor. This means that it is important to understand how the new conditions will affect the desired indicator at current prices and whether production volumes will grow.
Introducing a new business model. Today, many companies are moving into the field of online sales, which is why their cost structure is significantly changing. In this case, the break-even analysis allows you to determine whether it is necessary to resort to the introduction of new prices.

The threshold of profitability and the margin of financial strength of the enterprise

When planning profit, determining financial position firms quite often resort to the calculation of the break-even point. Entrepreneurs should consider two useful rules:

Ideally, revenue should be higher than this indicator, that is, it is necessary to produce goods in kind more than their threshold value. Due to this approach, the company's income increases.
Force of influence production lever the higher the closer production is to the breakeven point. Note that this rule also applies to reverse side. There is a certain limit of exceeding this indicator, after which a jump in fixed costs becomes inevitable. These include new means of labor, premises, an increase in the cost of managing the company.

The company needs to overcome the financial threshold of profitability, realizing that in the process of increasing income, there will come a time when, in order to further expand production, it will be necessary to sharply increase fixed costs. As a result, in short term profit will decrease.

The entrepreneur needs to keep these implications in mind when deciding how much to produce.

Margin of safety indicates how much you can reduce the sale / production of products, making it painless for the company. Excess real production above the threshold of profitability is a margin of financial strength:

Margin of financial strength \u003d Revenue - Threshold of profitability.

Margin of safety is the most important indicator that indicates the level of stability of the company. With the help of its calculation, it is possible to assess the possibility of an additional reduction in revenue from sales of products within the break-even point.

As practice shows, there can be three situations that affect the amount of profit and the margin of financial strength in different ways:

The volume of sales coincides with the volume of production.
The volume of sales is lower than the volume of production.
The volume of sales is higher than the volume of production.

The calculated and adjusted margin of financial strength is an important comprehensive indicator of the company's stability. It is necessarily used during forecasting and ensuring integrated resilience.

The size of financial strength shows what is the margin of stability of the company, and hence the profit. Remember, the lower the difference between revenue and profit margin, the higher the risk of loss.

Methods for calculating the profitability threshold and financial safety margin

You can determine the value of the threshold of profitability and the margin of financial safety and analyze the results using the graphical method. Thus, it is possible to see in what situation the efficiency of the company increases or decreases.

To build a graph, you will need:

Calculate the critical production rate for several sales volumes and put points on the graph.
Draw a general curve through the obtained points.

There is another option for calculating this indicator - using the Excel program. Then you need to do the following:

in the first column of the table, write a different volume of production / sales;
in the second column, put down the fixed costs for each volume;
in the third column - variable costs for each case;
enter in a separate cell the cost of a unit of product / service;
insert the formula for calculating the break-even point in the last column.

As you already understood, a special formula is used to calculate this coefficient. It uses the following designations:

B is revenue.
Zper - variable costs.
Zpost - fixed costs.
C - price, revenue per unit of production.
ЗСper - average variable costs (per unit of goods).
PRd - the threshold of profitability in monetary terms.
PRn - the threshold of profitability in physical terms.

To calculate the indicator in monetary terms, the formula is used:

PRd \u003d B × Zpost / (B - Zper).

PRn \u003d Zpost / (C - ZSper).

Recall that to determine how far the company is from the break-even point, allows the indicator of the margin of financial strength. This is the difference between the actual output and the output at the break-even point. Often, the analysis uses the percentage of the financial safety margin to the actual volume. This value sets the percentage by which the volume of sales can decrease so that this does not cause losses for the enterprise.

The following indicators are included in the formula:

B is sales revenue.
Рн - sales volume in natural terms.
Tbd - break-even point in monetary terms.
Тbn – break-even point in real terms.

This is how the formula for the margin of financial strength in monetary terms looks like:

ZPd \u003d (B - Tbd) / B × 100%, where

ZPd - a margin of financial strength in monetary terms.

Here is the formula for the financial safety margin in physical terms:

ZPn \u003d (Rn - Tbn) / Rn × 100%, where

ZPn - a margin of financial strength in physical terms.

Approaching the break-even point, the margin of safety changes rapidly, as you move away from it, this happens more slowly. This trend is clearly displayed on the graph of the dependence of the margin of safety on the volume of sales.

Way to lower the threshold of profitability

There is only one method that allows you to lower the financial threshold of profitability - this is an increase in gross margin, that is, marginal income. The latter is fixed costs during critical sales volume. This requires:

increase the volume of sales of goods;
raise the price of products, but not go beyond effective demand;
reduce variable costs such as salaries, rent or payments for public utilities;
reduce fixed costs, because they increase the indicator we need and reflect the degree of risk of entrepreneurial activity.

To provide the company normal work and development, you need to correctly combine low fixed costs with high gross margins. In this case, a simple formula will allow you to calculate the profitability threshold in this case: divide the fixed costs by the gross margin ratio.

Profitability- relative indicator economic efficiency. The profitability of an enterprise comprehensively reflects the degree of efficiency in the use of material, labor and monetary and other resources. The profitability ratio is calculated as the ratio of profit to the assets or flows that form it.

In a general sense, the profitability of products implies that the production and sale this product brings profit to the company. Unprofitable production is production that does not bring profit. Negative profitability is a loss-making activity. The level of profitability is determined using relative indicators - coefficients. Profitability indicators can be conditionally divided into two groups (two types): and return on assets.

Profitability of sales

Return on sales is a profitability ratio that shows the share of profit in each earned ruble. Usually calculated as the ratio of net profit (profit after tax) for a certain period to expressed in cash sales volume for the same period. Profitability formula:

Return on Sales = Net Profit / Revenue

Return on sales is an indicator pricing policy company and its ability to control costs. Differences in competitive strategies and product lines cause significant variation in return on sales values in different companies. It is often used to evaluate the operating efficiency of companies.

In addition to the above calculation (profitability of sales by gross profit; English: Gross Margin, Sales margin, Operating Margin), there are other variations in the calculation of the profitability of sales indicator, but for the calculation of all of them only data on the profits (losses) of the organization (i.e. e. data of Form No. 2 "Profit and Loss Statement", without affecting the data of the Balance). For example:

return on sales by (the amount of profit from sales before interest and taxes in each ruble of revenue).
return on sales by net profit (net profit per ruble of sales revenue (English: Profit Margin, Net Profit Margin).
profit from sales per ruble invested in the production and sale of products (works, services).

Return on assets

Unlike indicators of return on sales, return on assets is considered as the ratio of profit to the average value of the company's assets. Those. the indicator from form No. 2 "Report on financial results" is divided by the average value of the indicator from form No. 1 "Balance sheet". Return on assets, as well as return on equity, can be considered as one of the indicators of return on investment.

Return on assets (ROA) is a relative performance indicator, divided by dividing the net profit received for the period by the total assets of the organization for the period. One of financial ratios, is included in the group of profitability ratios. Shows the ability of the company's assets to generate profit.

Return on assets is an indicator of the profitability and performance of the company, cleared of the influence of the amount of borrowed funds. It is used to compare enterprises in the same industry and is calculated by the formula:

where:
Ra - return on assets;
P - profit for the period;
A is the average value of assets for the period.

In addition, the following indicators of the effectiveness of the use of certain types assets (capital):

Return on equity (ROE) is a relative indicator of performance, quotient of dividing the net profit received for the period by equity organizations. Shows the return on shareholders' investment in the enterprise.

The required level of profitability is achieved through organizational, technical and economic measures. Increasing profitability means getting more financial results at lower costs. The threshold of profitability is the point separating profitable from unprofitable production, the point at which the company's income covers its variable and semi-fixed costs.

The break-even point (profitability threshold) is such revenue (or the amount of production) that provides full coverage of all variable and semi-fixed costs at zero profit. Any change in revenue at this point results in a profit or loss.

To calculate the threshold of profitability, it is customary to divide the costs into two components:

· Variable costs - increase in proportion to the increase in the volume of production (sales of goods).

Fixed costs - do not depend on the quantity of products produced ( goods sold) and whether the volume of operations is growing or falling.

The value of the profitability threshold is of great interest to the lender, since he is interested in the question of the stability of the company and its ability to pay interest on the loan and principal. The stability of the enterprise determines the margin of financial strength - the degree of excess of sales over the threshold of profitability.

Let us introduce the notation:

The formula for calculating the profitability threshold in monetary terms:

PRd \u003d V * Zpost / (V - Zper)

The formula for calculating the profitability threshold in physical terms (in pieces of products or goods):

PRn \u003d Zpost / (C - ZSper)

The profitability threshold can be determined both graphically (see Fig. 1) and analytically.

With the graphical method, the break-even point (profitability threshold) is found as follows:

1. we find the value of fixed costs on the Y axis and draw a line of fixed costs on the graph, for which we draw a straight line parallel to the X axis;

2. select any point on the X axis, i.e. any value of sales volume, we calculate the value of total costs (fixed and variable) for this volume. We build a straight line on the graph corresponding to this value;

3. choose again any amount of sales on the x-axis and for it we find the amount of sales proceeds. We construct a straight line corresponding to this value.

The break-even point on the chart is the point of intersection of the straight lines built according to the value of total costs and gross revenue (Fig. 1). At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The amount of profit or loss is shaded. If the company sells products less than the threshold sales volume, then it suffers losses; if more, it makes a profit.

Figure 1. Graphical definition of the break-even point (profitability threshold)

Margin Threshold = Fixed Costs / Gross Margin Ratio

You can calculate the profitability threshold of both the entire enterprise and individual types of products or services.

The company begins to make a profit when the actual revenue exceeds the threshold. The greater this excess, the greater the margin of financial strength of the enterprise and the greater the amount of profit.

How far the company is from the break-even point shows the margin of financial strength. This is the difference between the actual output and the output at the break-even point. Often calculated as a percentage of the margin of financial strength to the actual volume. This value shows by how many percent the volume of sales can decrease so that the company can avoid a loss.