4 Indicators that any business needs to monitor to increase profits

Any business wants to increase their profits. But this goal is not properly planned and controlled. The business environment is competitive, the political and the unfriendly legislative environment. 

And then what companies need to do to achieve this ambitious goal. Companies do not have to work harder but increase their operational efficiency, which from a financial perspective will translate into increasing profitability. Generally and simplistically, many businesses and managers believe they can solve the problem of profitability if they manage to sell their products and services or if they increase sales.

But it's not like that. Sales are just one of the factors that influence the profit, the exclusive focus on this factor and the lack of an adequate analysis of the different planned scenarios in order to choose the most efficient scenario and the lack of monitoring the realized profitability will put the company in a position to have profits below expectations.

In addition, the causes of these outcomes will not be known. To overcome this impediment, businesses must monitor profitability using at least four of these indicators: Gross margin or (trade margin) Operating profit Net profit Profitability rates (or rates of return) Commercial Margin: It shows us the value or the profitability left after the decrease in the turnover of the goods or services sold. 

Commercial Margin = (Turnover - Cost of Goods or Services Sold) 

Attention is not the final profit but an intermediate profitability indicator. Commercial margins should be tracked both in absolute and percentage terms.

The trade mark helps us to identify the company's profitability from the perspective of the quality of the products and services and their appreciation on the market, respectively the price at which we can sell the products or services and the cost we can buy or produce.

 Obviously, the company will have a better margin if it manages to sell at a price that is better than the costs incurred. Operating profit It shows us the value or the profitability remaining after the decrease of all the operational costs but excluding the financial costs and the taxation.

 In operating costs, besides the cost of goods and services, we include all the other costs the firm has to employ to carry out its business. Operating profit = (Turnover - Total operational costs) Operating profit should be tracked both in absolute and percentage terms. It helps us to identify the company's profitability both from the perspective of the appreciation of the products and services provided and the efficiency of other operational costs. 

In other words, what is the operational efficiency of the firm. For example, a company may have quality products from selling to earn a good trade margin but have too high operating costs as a result of a malfunctioning organization and overall operating profit is weak.

Net profit 

Show the ultimate profitability after deducting all your costs: The cost of goods or services sold Other operational costs Financial costs (eg interest) Costs with corporation tax Net profit = (Turnover - Total costs) 

Both absolute and percentage should be tracked. It helps us to identify the company's final profitability both from the operational perspective and from the structure of financing sources and tax policy. For example, a company may have quality products from selling to earn a good gross margin and have a balanced operating cost that will allow it to have a good operating profit.

 However, due to the fact that the company has excessively used loans as sources of financing (it has a high degree of indebtedness) it has costs with very high interest rates and so the final profit is very small or we can even speak of a loss. 

Profitability rates (or rates of return) Absolutely absolute profit monitoring does not provide enough information for a complex business profiling analysis. Therefore, besides the profitability indicators in absolute value, we will also monitor the profitability rates called and the profitability rates. Return rates are performance indicators that compare outputs versus inputs. 

Rates compares a result indicator (profit or loss) with an indicator reflecting a flow of activity (turnover, committed expenditure) or invested / invested resources (total assets, invested capital). The main rates of return used in business analysis are: the rate of return on trade, the rate of return on costs, the rate of economic profitability and the rate of financial return.

Profitability rates (or rates of return) 

Absolutely absolute profit monitoring does not provide enough information for a complex business profiling analysis. Therefore, besides the profitability indicators in absolute value, we will also monitor the profitability rates called and the profitability rates.

 Return rates are performance indicators that compare outputs versus inputs. Rates compares a result indicator (profit or loss) with an indicator reflecting a flow of activity (turnover, committed expenditure) or invested / invested resources (total assets, invested capital). The main rates of return used in business analysis are: the rate of return on trade, the rate of return on costs, the rate of economic profitability and the rate of financial return. Rate of commercial profitability The quality of a company is validated by the appreciation of its products on the market situation evidenced by the turnover. The ratio between the result obtained and the turnover represents the rate of commercial profitability. 

RRC = Result * 100 Fiscal value

In the case of the outcome, several profitability indicators can be used: gross margin, operating profit, net profit, explained previously, and therefore the first three indicators will be calculated in both absolute value and percentage. It helps us to identify the operational efficiency of the company this time in percentage value that has the advantage of better comparability from time to time, to different volumes of activity or to other companies in the industry. 

Rate of return on costs It highlights the company's profitability in relation to the costs incurred.

 Cost Cost Ratio = Result * 100 Total costs 

Rate of economic profitability Reflects the ratio between the economic result (profit or loss) and the economic means employed to obtain it, ie the total assets. 

RRE = Result * 100 Total assets

In the case of this rate, it will most often take into account EBIT (Pre-tax profit and interest). It is an indicator that is often used in international practice known as Return on Assets. 

Why do we use profit before tax and taxes instead of gross or net profit? EBIT has the advantage of calculating the rate of return independently of the financial structure or fiscal policy of the state. Thus we will identify the operational efficiency of the firm. In contrast, if we use net profit instead of EBIT, the profitability indicated is also influenced by tax and interest costs. 

Financial profitability rate RRF is an indicator commonly used in international practice called Return On Equity Reflects the return on shareholders' equity investments. It is calculated as the ratio between net result and equity.

 RRF = Net profit * 100 Equity

This rate is a relevant indicator in assessing the company's position on the market. Companies with a good rate are attractive to potential investors. Also, current owners, the better the return on money invested, will be interested in reinvesting money in the company to develop capacity and increase profits. Once you calculate how we use these indicators? 

We can compare these indicators from one period to the next, or against other firms in the industry, and we can identify weak or poorly profitable areas for which optimization measures will be taken. What indicators do you use in monitoring and increasing profits?

Dearfully,

Adrian