How to determine profitability

Even if you do not have an economic education, you can hardly do without the ability to determine profitability in business. Profitability is a clear indicator of the meaning of any commercial activity. Observing how profitability changes over time, you can make competent management decisions regarding absolutely all areas of the organization: from cost reduction and pricing to assortment policy and creating your own sales network.

Instruction manual

1

There are many types of profitability. But most often in the case when it is necessary to determine profitability, they mean profitability of sales or profitability of products. In order to visually make the necessary calculations, we use a simple example.

Suppose you bought a batch of goods for 80, 000 rubles. Sold this batch for 120, 000 rubles. Thus, 40, 000 rubles were profitable.

2

In order to determine the profitability of sales, you need to divide the profit from the sale by the revenue from the sale and multiply the result by 100 percent, since profitability is usually considered as a percentage.

40, 000 / 120, 000 * 100 = 33, (3)%

Return on sales, thus, shows the share of profit in revenue, and in our example it was 33%.

3

In order to determine the profitability of products, the opposite effect is performed. It is necessary to divide the profit from the sale by the purchase price of a consignment of goods and, again, multiply by 100 percent.

40, 000 / 80, 000 * 100 = 50%

Product profitability shows how much profit falls on each unit of goods sold.

• profitability 40
• Return on sales