Profitability reflects the profitability of a specific company and its assets. The indicator also demonstrates the level of efficiency of business processes and the sales model in the company.
What is profitability in business?
Profitability must be calculated for a number of reasons:
1) To scale the company’s activities. It is impossible to qualitatively scale a business that shows weak profitability. During active growth, such a company may not have enough resources, and many of the business processes will require direct intervention of the entrepreneur to normalize the situation. On the contrary, if you understand the company’s profitability figures and sufficient payback in business, you can implement a systematic and consistent growth of all key financial indicators.
2) To reduce costs . In almost any company, saudi arabia phone number list you can reduce costs without reducing the efficiency of the organization. Reducing unnecessary expenses will allow you to direct the released funds to what directly affects profitability. For example, redistribute funds to advertising budgets and get additional sales. Or invest in employee training and improve their performance, which will also have a positive effect on profitability.
3) To sell a business or attract investment. When an entrepreneur thinks about selling his enterprise or wants to attract investment for development, he needs to know all the profitability indicators. These are the figures that investors javier prado and potential buyers of the company look at first.
4) To optimize business processes. Low profitability may indicate the inefficiency of the company’s internal processes. In this case, it is necessary to optimize. For example, take measures to automate sales, implement modern services, resource data a CRM system (Customer Relationship Management) for closer interaction with the audience of potential buyers and with the company’s real client base.
Profitability is also usually divided into categories:
- Return on sales . Shows what share of the company’s turnover it receives as net profit.
- Return on assets. Shows the profitability of a particular asset of the company. For example, the assets of the enterprise include equipment and special machinery. It is important to calculate their profitability indicators in order to identify why the company spends funds irrationally.
- Return on invested capital. This indicator is calculated most often. Especially in those companies that are active on the Internet and attract most of their customers through online advertising. In this case, it is really important to calculate ROI (Return on Investment). ROI can even be calculated for a specific advertising campaign or a separate advertising channel. This metric shows how effective and profitable this or that action is for the company.
There are other categories of profitability, but the ones described are the most common and used.