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Gross profit as a method of estimation of production efficiency

 The example of the relation of profit to revenue

The management of the enterprise depends on many factors – awareness of technical, financial, legal and social processes and the  phenomena, business intuition, experience of doing business in the conditions of modern market economy. In the basis of any business activity is the desire to receive the maximum profit without loss of product quality and with minimal risks for the enterprise. The profit is the final, final indicator of the efficiency of work of the enterprise and the profit and this enables the company to develop and optimize its industrial potential. In order to correctly and consistently to guide and regulate financial flows within the enterprise, and from the outside, you need to have a certain competence in the profits, its sources, classifications and optimal ways of its further use. One such species and is, gross profit, we'll talk about it in this material.

Gross profit (EAP) and cost

If the notion of profits includes the difference between expenditures and revenues from the sale of goods or services, the gross is a measure of the effectiveness of production and financial policy of enterprise. So, the gross profit is the difference between the proceeds of the realized goods or services and their cost. It is important to note that in contrast to the net profit of the EAP does not exclude variables and operational costs and deductions for income taxes. In official terms, the gross profit is thus: VP=b-C, where ’s revenues for sold goods, and With – cost of goods produced and services. Gross profit is the profit from realization of goods or services less its cost.

To correctly and objectively gain, gross profit enterprises need first of all to identify all items of expenditure, which includes the cost of the goods, including variables that have not been determined and calculated. So, according to the most widespread definition, the cost of this entire amount of resources, expressed in terms of money, which was spent on the production and sales of goods or services. Thus, only having a full picture of all the costs incurred production to the manufacture and realization of the goods or services can be related objectively to calculate the amount of gross profit for a given period of time.  

Factors affecting gross profit

 The growth in gross profit

Like any other financial category, EAP affected by a number of factors. Conditionally they can be divided into the factors that depend on the activity of the entrepreneur and independent factors. The first category includes the dynamics of growth of volumes of manufacture and realization of production, expansion of assortment, improvement of quality and competitiveness of products, reduction of costs, optimization of productivity and efficiency of each unit capacity, the maximum use of production facilities and capacities, regular review and, if necessary, revision of the company's marketing strategy. The second category includes factors, which cannot be affected by the economic entities: geographical, natural, environmental or territorial conditions, legislative regulation, change of the state strategy in support of business, international and global changes affecting resource supply and transportation enterprises.

If the second category of factors obliges to choose a flexible and fast-changing management strategy, which would ensure the continuation of the operation of enterprises without or with minimal losses and the costs of the factors of the first category, it takes an experienced and competent management.

Increasing production and sales, and thereby increasing the trade turnover, the company promotes the growth of its gross income, here is directly proportional dependence. Because of great importance to give support to the pace and volume of production at a stable level, avoiding the deterioration, as it inevitably will entail negative reflection on gross revenues. It is important to note that the extremely negative role have unrealized remains products, which could generate income, but for one reason or another become a superfluous ballast for the enterprise. Some managers sometimes use the strategy of discounts, extra goods at reduced cost or barter residues, to the maximum of their implementation and the return of spent capital into a revolving Fund. Most often, the gross income of such marketing efforts do not bring, and if a positive result is minimal. 

It is very important to influence the production cost – use of innovative technologies in the production, search lowest possible ways of delivery of goods, implementation, and use of alternative and efficient energy resources ultimately leads to lower costs and significantly impact on the gross profit of the enterprise.

One of the most important factors worth noting price policy of the company ’ high competition in the modern market economy constantly stimulates the manufacturer to the revision of pricing. Here intersect two categories of factors, because the state Antimonopoly policy interferes with the price policy of the company, on the one hand promoting healthy competition on the market of goods and services, and on the other – prevent free to set prices on certain products. But you should not try to permanent loss rates to increase trade company ’ s stable and steady course will help you confidently to stay afloat, and it will in any case better than a hectic increase with the objective of maintaining a stable income. 

The analysis of profitability of production allows to determine on which the product is to bet the pot, and the need to release what products need to shorten or to restrict. It is obvious that the turnover cost-effective product allows a maximum gross income, thereby increasing net profit of the company.

When functioning of any production arise over time inventories that are no longer used, or their use impractical. This may occur due to poor management, or due to objective factors. In this case, in order to avoid damages which may arise in connection with the fact that the ownership of these assets and their subsequent implementation will be much lower than the costs of their acquisition, is to implement measures for their implementation. Money received from sale of fixed assets, will also be part of a gross profit of the enterprise.

Another source for increase in gross profit non-operating income – coming rents, interest and dividends on the shares or deposits, penalties and sanctions in favor of enterprises and other sources.

Optimal distribution of gross profit

 so, having sold products, and having a certain amount of money, you need to properly and constructively dispose of them, not forgetting any of the items of expenditure. Imagine conditional pyramid, at the top of which stands the total volume of gross profit, followed by various sources expenses: rent for the construction of production objects, interest payments on existing loans, various charitable contributions and funds, all kinds of taxes, and the main thing – net profit. Next, the net profit also divided into several groups – environmental funds and payments, selection, training and preparation of personnel potential, social funds on the creation of social infrastructure, both businesses and the state in General, the personal income of the company owners, and the reserve money savings.

 The example of calculation of gross profit

Good effect gives the strategy payment of salaries to staff when they get not only a flat fee for their work, but as the owner of the enterprise portion of the profits from the total gross income of the enterprise. Such payments are premium character, and, as a rule, are made irregularly, often at the end of the year or accounting period.

 it Should be noted that all kinds of payments are divided conditionally into two categories – the minimum amount of which is fixed, and those, whose distribution depends on the managers and owners of production. The advantages include various types of payments for rent, interest, loans. The second category is more specific, as the volume of payments in charitable foundations or social needs depends on decisions of the governing apparatus, and therefore may not always objective and useful. The increase of the part of their profit from a businessman, and hence reducing expenditures on other articles could further adversely affect the growth dynamics of the enterprise's development. This is due first and foremost, by human factor, which plays a most important role in the production process – a full social package for the staff, a developed social support and infrastructure significantly affect the level of labour productivity.

Thus, the objective and detailed approach to the distribution of the gross income of any company gives an opportunity not only to its further development, expansion of production capacities and to develop the human capacities, but also contributes to a further increase in net income of the enterprise. 

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