How I measure the profitability of my PYME – Small business?

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The entrepreneur and the SME entrepreneur, often found in the dilemma of making certain decisions. Some go for costs, others go for revenue.

There are some interesting questions that should address, starting with profitability. It is extremely important topic that often leads to many errors of assessment.

One classic is to confuse profitability with money. Making money does not necessarily mean being profitable. One can make money and melt your company.

The point here is to earn enough money to break the equilibrium point. Here begins our discussion about “who is and who is not profitable.”

Profitability expresses a relationship between the benefits of a particular investment and the resulting effort to do it. This effort can be classified as a cost or expense.

The company starts making money when you start its activities, develops, but is profitable as long as the value of its sales, exceeds the structure of both fixed and variable costs.

What is the difference between an expense and a cost?

In reality, it is difficult to differentiate between them. When we talk about cost, we talk about the expenditure not yet expired or remains “alive”, we define as an expense when it expired, was extinguished.

It is a sacrifice of securities or consideration of the economic kind made to acquire goods, rights or services for use in generating operating income. When accounting differ, it is assumed that the cost finances an activity that will generate future income and spending is considered a resource that finances a specific activity for the benefit of the company. The raw material would cost and salaries of management, represent an expense.

Being profitability, a relationship established between resources and benefits, you can set different types of returns.

We can differentiate for example, shareholder return profitability of the total investment of the company.

ROE (return on equity) is the magnitude representing what extent is paid the effort of the owners to link the net profits of the enterprise value of equity.

The ROA (return on assets) is the ratio between the earnings of the company and the value of its total assets. Represents the benefits that the total investment of the company.

Is there only one way to get profitability?

Dupont, in the early twentieth century, developed a more complete formula of profitability, adding a number of effects that allow observe how it is made.

Profitability = Net income / sales (margin) * sales / assets (rotation) * assets / equity (leverage)

The separation observed, was to review the power from the formula, certain effects. For example, talk about margin and rotation, which is talking about the business, or to check the level of leverage, which is a financial concept.

The distinction is interesting to observe that the profitability is increased as a result of business activity but also because of their leverage.

Leverage creates financial risk because it assumes that the equity capital is less about the total investment, and if the contribution the owners do not have to do what others who charge interest for the use of capital.

As for the first two sections of the formula, it is interesting to know whether there is proportionality in terms of the results, or if a component protruding above the other. A business may have a marked operations on the basis of rotation, or on the basis of the margin.

We still talk about that intangible profitability is often not taken into account when the balance sheet. The “social profitability”. The term is not very healthy because it tends to confuse the concept.

Public enterprises, do not pursue profit, therefore, can not talk about profitability, we must speak balanced budget. To talk about profitability in public companies, what we should do is to add the benefits accruing to firms / users receiving the service.

A company that uses public transportation to move their cargo to a port, has a subsidized cost. The portion of income subsidized cost product that should be part of the income of the state company if “really want to know” the leaves in community terms, a public organization. A challenge to the traditional way of measuring public bodies.

Perhaps better we clarify things if we distinguish two concepts. The yield on the one hand, and value creation on the other.

A company can be profitable through its activity but create serious environmental problems. A business can be profitable and generate a bad work environment. In any case the result is the same value is destroyed.

Returning to the activity for profit. There is a short-term profitability and long term. The short can be towering over the other, but harmful. Profitability has communicating vessels. One of them is the “sale”. Sales force can generate short-term profitability, and destroy trade relations, creating problems in the long run. Therefore it is said to be a combination of quantity or volume and sustainability over time.

It is important that the entrepreneur and the SME entrepreneur understand these concepts and work conducting ongoing assessments on the subject. There are two errors that usually falls easily, are two temptations.

The first is to analyze profitability in current situations, without giving intervention concepts as effectiveness and efficiency. In this case, the “perspective” is vital “. You can not talk about what has been gained or lost without understanding the context in which they work. There are times to win and times to sustain investment.

The other trap that is usually fall in yields compare companies in the same area, directly. While it is important to compare, it is a measure to know where you stand. different aspects must be taken into account in that comparison makes sense. It is not the same for example, compare two companies in the same category but different growth cycle. An introduction stage company capital will require higher doses than in the mature stage. The proceeds will be unstable in the first and most stable in the second.

Any analysis that does not put emphasis on a professional assessment system runs the risk of being biased and a poor platform for making business decisions.

How I measure the profitability of my PYME – Small business?

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