What is the threshold of profitability. Financial threshold of profitability: what is the use of this indicator. Determination of the threshold of profitability

The threshold of profitability is characterized by the number of products sold, the proceeds from which corresponds to the total costs of the enterprise. In other words, this is the volume of sales at which the company still does not make a profit, but no longer incurs losses.

Due to the proceeds received from the sale, the company manages to compensate for the costs of a variable type, as well as those related to fixed ones. Despite the fact that the company will not have a profit, it will still receive marginal income, which is the difference between revenue and non-fixed costs.

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The category of variables includes those costs that are directly related to production (the cost of raw materials, piecework wages, etc.) and are directly dependent on production activities. Fixed costs are due to the actual need to organize production, rent premises and equipment, pay utility bills and do not depend on the volume of output.

Basic moments

What is the threshold of profitability - can be easily understood by imagining an enterprise that is just starting its activity. For some time, it will only work to recoup the previously invested funds, and the moment when it succeeds, but at the same time it will not have actual profit, is precisely called the profitability threshold.

The definition of this moment is necessary for:

• identifying conditions when the company fails to recoup the average variable costs, and it is more expedient to stop its activities;
• solving the problem of obtaining maximum profit and a more rational distribution of resources, as well as optimizing certain costs;
• the ability to calculate the minimum volume of production and subsequent sale of goods, at which the business will reach the break-even level.

Important Factors

The value of profitability depends on several factors, in particular on the price at which products are sold, as well as on what the level of costs of a fixed and variable type. Changing these factors directly affects the threshold of profitability. The break-even point is calculated only after the division of costs into fixed and variable has been completed.

The constants do not change or change little over a certain period:

• salary;
• management and administrative expenses;
• communal payments.

The peculiarity of fixed costs is that they are weakly amenable to reduction even in the case of a decrease in the volume of production itself, in contrast to variables that are directly proportional to the amount of manufactured products.

This includes:

• spending on the purchase of raw materials and materials;
• fare;
• remuneration of workers in professions of a production nature;
• payment for consumed energy resources;
• trade-commission plan expenses.

Classic Formula

To determine the threshold of profitability, physical terms or monetary terms can be used. In the first case, this is determined by the ratio of the sum of fixed costs of the enterprise incurred during the planning period to the difference between the cost of a unit of output and the sum of variable costs for its manufacture.

The calculation formula in this case is as follows: TBsht. = Fixed costs / (Price of one unit of product - Sum of variable costs for each unit of product). The resulting value shows the minimum of products that must be manufactured and sold during the planning period in order to reach the breakeven level.

Due to the fact that in most cases an enterprise is engaged in the manufacture of not one, but several different types of products, it is more expedient to use a different approach based on total sales in monetary terms to determine the profitability threshold.

In this case, this indicator will express the ratio of the product of the amount of fixed costs incurred by the proceeds received from the sale to the difference between the proceeds from the sale of funds and the cost of the product that was sold.

The formula in this case looks like this:

Tbrub \u003d Fixed costs x Sales proceeds / (Proceeds from sales - Variable costs).

Main indicators

The most significant indicators that allow to analyze the financial situation of the company are the following coefficients:

The attractiveness of an enterprise is determined primarily by the level of its profitability, as it demonstrates the maximum percentage that the company can afford.

Rules for calculating the profitability threshold

For each company, the calculation of the profitability threshold is extremely important in terms of obtaining more complete information about its financial condition and the possibility of planning potential profits. In this case, certain rules must be followed.

In particular, since this indicator reflects sales at which the company is not yet making a profit, it is reasonable to aim for a position where the revenue received will exceed the profitability threshold.

The second rule that the management of the enterprise must remember is that the production lever increases its strength as the break-even point approaches. It follows from this that when a certain level exceeding the threshold of profitability is reached, an inevitable sharp increase in fixed costs occurs.

The company must certainly overcome the breakeven threshold, otherwise there will be no point in its existence. At the same time, it is important to realize that at some point the continuation of production will become impossible without an increase in fixed costs, which, in turn, will lead to a decrease in profits in the short term.

Other nuances

detailed instructions

The task of finding the profitability threshold can be solved analytically or graphically. Analytical implies the implementation of the calculation of this indicator using the formula: Threshold of profitability - Fixed costs / gross margin ratio.

In turn, the gross margin is calculated by subtracting the amount of variable costs from the amount of revenue, and to determine its coefficient, it is required to divide the amount of the gross margin by the amount of revenue.

You can also use a single formula for calculating the profitability threshold as the product of the amount of fixed costs by the amount of revenue (minus variable costs).

To find the break-even point using a graphical method, you must first draw the chart itself. After that, on the Y-axis, you should set the values ​​\u200b\u200bof fixed costs. By drawing a line parallel to the x-axis, you need to mark the fixed costs on it. On the X-axis itself, the point of sales volumes is determined, for which the sum of permanent and variable costs is calculated. A straight line is drawn according to the set values.

On the X axis, one more point of sales volumes is marked and the amount of revenue for this value is determined. According to the obtained values, a straight line is also constructed.

The critical (or break-even point) on this chart is the point formed at the intersection of the above two lines. With a properly constructed schedule, you can easily compare expenses with income received from the sale of products.

The margin of financial strength is an indicator showing how much reduction in production and sales of products can be allowed without loss to the company. The concept of a financial safety margin includes the entire volume of real production that goes after the break-even point. It is calculated by subtracting the value of the threshold of profitability from the amount of revenue.

This indicator is extremely important in terms of assessing how financially stable the enterprise is. Its calculation makes it possible to assess whether an additional reduction in revenue is acceptable within the break-even point.

The essence of the effect of operating leverage is that with any change in the proceeds received from the sale of products, profit invariably changes to an even greater extent.

Operating leverage operates due to the fact that conditionally fixed and conditionally variable costs disproportionately affect the financial result in the event of a change in the volume of manufactured and sold products. The action of the lever is the stronger, the greater the share in the cost of production is occupied by the costs of a conditionally permanent category.

You can calculate the operating leverage by dividing the contribution margin by the profit that was received from the sale. For the calculation, it is required to find the difference between the proceeds from the sale of goods and the sum of the costs incurred on the total production volume.

You can find out the value of profit from sales by subtracting from the amount of revenue the entire amount of funds (fixed and variable) that were spent on all production.

The greater the indicator of the financial strength of the enterprise, the more stable it is from a financial point of view. The goal of any management of the company is to increase the gap between the threshold of profitability and the revenue received.

Graphically or via Excel

An example of calculation via Excel is presented below:

• first, fixed and variable costs, as well as the cost of a unit of goods, are prescribed in the corresponding cells;
• on the basis of them, the calculation of changes in profits and costs is made, depending on the volume of goods sold;
• fixed costs remain the same regardless of output, but the sum of variable costs increases in proportion to production.

Another extremely popular, simple and visual way to find the break-even point is to use a chart. The profitability threshold will be located at the point where the income line intersects with the company's total cost line, or where the net profit indicator will be equal to zero.

How can you reduce

Of the effective methods that allow to achieve a decrease in the level of transition of the profitability threshold, it is worth mentioning only an increase in marginal income corresponding to permanent costs at a critical volume of sales.

Break even- this is the volume of production and sales of products at which expenses will be offset by income, and in the production and sale of each subsequent unit of production, the enterprise begins to make a profit.

In other words, the break-even point is understood as such a moment when the company fully covers the losses and the company's activities begin to bring real profit.

The break-even point is the sales volume at which the company's profit is zero. Profit is the difference between income and expenses.

The break-even point is measured in physical or monetary terms. This indicator of the break-even point allows you to determine how many products need to be sold, how much work to perform, or services to provide, so that the company's profit would be equal to zero.

Thus, at the break-even point, income covers expenses. If the break-even point is exceeded, the company makes a profit, if the break-even point is not reached, then the company incurs losses.

What is the purpose of the breakeven point?

The break-even point calculation allows you to:

determine the optimal cost of selling products, performing work or providing services;

monitor changes in the break-even point indicator in order to identify existing problems in the process of production and sale of products, performance of work, provision of services;

analyze the financial condition of the enterprise;

find out how a change in the price of products sold, work performed, services provided or costs incurred will affect the resulting revenue.

Break-even point and practice of its use

Break-even point analysis is used for various purposes.

Let's consider some directions and purposes of using this indicator.

We give in the table the goals of the possible use of the break-even point indicator in practice:

The use of the break-even point model is used in management decisions and allows you to give a general description of the financial condition of the enterprise, assess the level of critical production and sales in order to develop a set of measures to increase financial strength.

Steps to determine the break-even point

In practice, there are three stages to determine the break-even point of the enterprise.

Gathering the necessary information to carry out the necessary calculations. Evaluation of the level of production volume, product sales, profit and loss.

Calculation of the size of variable and fixed costs, determination of the break-even point and safety zone.

Assessment of the required level of sales / production to ensure the financial sustainability of the enterprise.

The task of the enterprise is to determine the lower limit of its financial stability and create opportunities for increasing the security zone.

Calculation of the break-even point and variable, fixed costs

To find the break-even point, you need to determine which of the costs of the enterprise are related to fixed costs and what costs are included in variable costs.

Since these costs affect the determination of the break-even point and are mandatory components for calculating the break-even point.

Fixed costs include: depreciation deductions, salaries of administrative and managerial personnel with deductions from salaries to extra-budgetary funds, rent of office space and other expenses.

Variable costs include: materials, components, semi-finished products used in production, fuel and energy for technological needs, wages of key workers with deductions from wages to off-budget funds and other expenses.

Fixed costs do not depend on the volume of production and sales and do not change over time.

At the same time, the following factors can affect the change in fixed costs: growth / fall in the productivity of the enterprise, opening / closing of production workshops, increase / decrease in rent, inflation and other factors.

Variable costs depend on the volume of production and change along with the change in volume. Accordingly, the greater the volume of production and sales, the greater the variable costs. Variable unit costs do not change with the volume of production. Variable costs per unit of output are conditionally fixed.

Formula for calculating the break-even point

To calculate the break-even point, you need the following indicators:

1. Calculation of the break-even point (BBU) in kind:

BEPnat = TFC / (P-AVC)

BEPden = BEP nat * P

Variable costs for the production of a unit of output (AVC): 100 rubles;

Selling price (P): 200 rubles.

Substitute the original values ​​in the formula:

BEP nat = 50,000 / (200-100) = 500 pieces.

BEPden \u003d 500 pcs. * 200 rubles. = 100,000 rubles.

2. Calculation of the break-even point (BBU) in monetary terms:

BEPden = (TR* TFC) / (TR-TVC)

You can also calculate the break-even point through marginal income.

MR = TR-TVC, or MR per unit =P-AVC

KMR = MR / TR, or KMR per unit = MR per 1 unit /P

Based on the obtained values, we obtain:

BEPden = TFC / KMR

For clarity, consider a numerical example:

Fixed expenses of the enterprise (TFC): 50,000 rubles;

Variable expenses (TVC): 60,000 rubles;

Revenue (TR): 100,000 rubles.

Substitute the values ​​in the formula:

BEPden \u003d (100,000 * 50,000) / (100,000-60,000) \u003d 125,000 rubles.

MR = 100,000-60,000 = 40,000 rubles

KMR = 40,000 / 100,000 = 0.4

BEPden \u003d 50,000 / 0.4 \u003d 125,000 rubles

Thus, it can be seen that the BEP values ​​calculated by the two formulas are equal.

If an enterprise sells its goods for 125,000 rubles, then it will not suffer losses. As for the coefficient of marginal income, it shows that each ruble of revenue received from above will bring 40 kopecks of profit in this case.

conclusions

The break-even point model allows you to determine the minimum allowable limit of sales and production for the enterprise. This model can be well used for large enterprises with a stable sales market.

The calculation of the break-even point allows you to determine the safety zone - the remoteness of the enterprise from the critical level at which profit is zero.

To calculate the profitability threshold, apply:

• - mathematical method (equation method);
• - method of marginal income (gross profit);
• - graphic method.

In accordance with this model, the mathematical relationship between profit, production volume and costs has the following form:

PR = pq - c - vq (1)

where PR - profit from the sale of products, monetary units; p is the selling price of a unit of production, monetary units; q - the number of sold units of production, natural units; c - total fixed costs, monetary units; v - variable costs per unit of output, monetary units.

Based on formula (1), it is easy to solve the main tasks of the break-even analysis: determining the break-even point; determination of production volumes to obtain target profit; determination of the price in the break-even analysis.

The break-even point is the sales volume of a product at which sales revenue covers total costs. At this point, revenue does not allow the organization to make a profit, but there are no losses either. Accordingly, according to expression (1), the formula for determining the break-even point (Qk) will take the following form:

Qk = c / (p - v) (2)

Break-even analysis allows you to determine the number of units of production Qpl, which must be produced and sold to obtain the planned profit PRpl.

Based on formula (1), the desired volume of production (Qpl) is calculated as:

Qpl \u003d (PRpl + c) / (p - v) (3)

Break-even analysis can also be used to make pricing decisions.

Based on formula (1)

(considering that at the breakeven point PR=0)

the minimum allowable unit price to cover total costs will be determined as follows:

Pmin \u003d (c + v q) / q (4)

Formula (4) serves as a starting point for calculating the price that needs to be set in order to obtain the planned profit (Ppl):

Ppl = (c + v q + PRpl) / q (5)

Consider the method of marginal income, which acts as an alternative to the mathematical method.

The marginal method includes profit and fixed costs. This method implies that the organization sells its product in such a way that the resulting marginal income can cover fixed costs and make a profit. The point when the marginal income received is able to cover fixed costs is called the equilibrium point.

In this case, the calculation formula looks like this:

P \u003d MD - Zpost,

Since at the equilibrium point the profit is 0, we transform the formula as follows:

MDed * OR = Zpost,

where OR is the volume of sales. Here OR is the threshold of profitability. The formula for calculating the profitability threshold in this case is as follows:

PR \u003d Zpost / MDed,

In the case of making long-term decisions, it is necessary to calculate the ratios of marginal income and sales proceeds, i.e. you need to determine marginal income as a percentage of revenue.

For this, there is the following calculation:

(MD / VR) * 100%,

Therefore, by planning the revenue from product sales, you can set the expected marginal income.

It is also necessary to know that the above formulas remain correct only when making short-term decisions.

Secondly, the break-even analysis of production gives reliable results if the following conditions and relationships are met:

• - variable costs and sales revenue should have a linear dependence on the level of production;
• - labor productivity cannot change within the largest base;
• - specific variable costs and prices must remain constant during the entire planning period;
• - the structure of production cannot change during the entire planning period;
• - change in fixed and variable costs can be measured accurately;
• - at the end of the analyzed period, the company does not leave stocks of finished products, i.e. the volume of sales corresponds to the volume of production.

Failure to comply with any of these conditions may result in erroneous results.

The business must necessarily pass the threshold of profitability and take into account that following the period of increasing the mass of profits, there will inevitably come a period when, in order to continue increasing output, a sharp increase in fixed costs will be necessary, as a result of which there will be a decrease in profit received in the short term.

The profitability of sales is determined by the ratio of profit from the sale of products or net profit to the amount of proceeds from the sale of products without VAT and excises, expressed as a percentage:

R = (P / BP) * 100%,

where - R - profitability in terms of turnover;

P - profit;

VR - proceeds from sales.

This indicator characterizes the efficiency of entrepreneurial activity: how much profit an economic entity has from the ruble of sales, work performed, services rendered.

The profitability of commercial output and individual types of products is determined by the ratio of profit from the release of products or products of a certain type to the cost of commercial output:

Rtv \u003d (Pv / Stv) * 100%,

Rtv - profitability of commodity output and individual types of products;

Pv - profit from the release of products or products of a certain type;

Stv - the cost of commercial output.

This indicator characterizes the absolute amount or level of profit per ruble of funds spent.

Sources of information for the analysis of indicators of profitability of products, works, services are form No. 2 of financial statements, accounting registers of an economic entity.

Changes in the level of profitability of sales occur under the influence of changes in the structure of products sold and changes in the profitability of certain types of products.

The profitability of certain types of products depends on:

• - on the level of sales prices;
• - on the level of production cost.

The analysis is carried out in the following sequence.

Determine the level of profitability of implementation according to the plan, actually for the reporting year, for the previous year. Then the object of analysis is determined: from the actual level of profitability for the reporting year, the planned level of profitability for the reporting year should be subtracted.

The following factors influenced the change in the level of profitability of sold products, works, services:

• 1. Changing the structure and range of products leads to an increase in the profitability of products sold. To do this, you need to define:
  • - profitability of sales for the previous year. The amount of profit is calculated based on the volume, structure, prices and cost of the previous year;
  • - profitability of sales, calculated with the amount of profit, which is determined based on the volume and structure of the reporting year, but the cost and price of the previous year.
• 2. Change in cost. To do this, it is necessary to determine profitability based on the cost of the reporting and previous years, i.e., the volume and structure of sales of the reporting year, the cost of the reporting year, and the prices of the previous year, i.e., it is necessary to exclude the effect of price changes.
• 3. Change in the price level. The level of profitability is determined with profit calculated with the volume, structure, cost and prices of the reporting year.

The analysis of the profitability of the output of certain types of products is carried out on the basis of the data of planned and reporting calculations. The level of profitability of certain types of products depends on the average selling prices and unit cost of production.

The calculation of the influence of these factors on the change in the level of profitability is carried out by the method of chain substitutions for each type of product.

To assess the dynamics of the levels of profitability of commercial output of certain types of products, it is necessary to compare the actual indicators of the reporting year by types of products with the actual indicators for a number of previous years, which will make it possible to determine the trend in the profitability of products, and, consequently, the phase of the product life cycle.

In conclusion, it is necessary to give an overall assessment of the level of profitability of individual products.

The margin of financial strength shows how much it is possible to reduce the sale (production) of products without incurring losses. The excess of real production over the threshold of profitability is the margin of financial strength of the company:

ZFP = VR-PR,

where ZFP - margin of financial strength;

VR - proceeds from sales;

PR - the threshold of profitability.

The margin of financial strength of an enterprise is the most important indicator of the degree of financial stability. The calculation of this indicator makes it possible to assess the possibility of an additional reduction in revenue from sales of products within the break-even point.

In practice, there are three situations that will affect the amount of profit and the financial strength of the enterprise in different ways:

• 1. Sales volumes coincide with production volumes;
• 2. Sales volumes are less than production volumes;
• 3. Sales volumes are more than production volumes.

Both the profit and the margin of financial safety obtained with an excess of production are less than with the corresponding volume of sales to the volume of production. Therefore, an enterprise interested in improving both its financial stability and financial results should strengthen control over production volume planning. In most cases, an increase in the inventory of an enterprise indicates an excess of production. An increase in stocks in terms of finished products directly testifies to its excess, indirectly - an increase in stocks of raw materials and starting materials, since the enterprise bears the costs for them already when they are purchased.

A sharp increase in inventories may indicate an increase in production in the near future, which should also be subjected to a rigorous economic justification.

Thus, if an increase in the company's reserves is detected in the reporting period, it can be concluded that it affects the value of the financial result and the level of financial stability. Therefore, in order to reliably measure the value of the financial safety margin, it is necessary to correct the sales proceeds by the amount of the increase in the company's inventory for the reporting period.

In the last version of the ratios - with a sales volume greater than the volume of production - the profit and the financial safety margin are greater than with the standard construction.

However, the fact of selling products that have not yet been produced, that is, in fact, does not yet exist at the moment, imposes on the enterprise additional obligations that must be met in the future. There is an internal factor that reduces the actual value of the financial safety margin - this is hidden financial instability. A sign that an enterprise has hidden financial instability is a sharp change in the volume of stocks.

From the foregoing, it follows that in order to measure the financial strength of an enterprise, it is necessary to perform the following steps:

• 1. Calculate the stocks of financial strength;
• 2) Analyze the impact of the difference between sales volume and production volume through the correction of the value of the financial safety margin, taking into account the increase in the inventory of the enterprise;
• 3. Calculate the optimal increase in sales volume and financial safety margin limiter.

The margin of financial strength, calculated and adjusted, is an important comprehensive indicator of the financial stability of an enterprise, which must be used in predicting and ensuring the comprehensive financial stability of an enterprise.

The assessment of the financial safety margin is made according to the formula:

F \u003d ((VR - PR) / VR) * 100%,

where F is an indicator of assessing the margin of financial stability;

VR - proceeds from sales;

PR - the threshold of profitability.

Having a large margin of financial strength, the company can develop new markets, invest in securities and in the development of production.

Forecast profit calculations are important not only for the enterprises themselves and organizations that produce and sell products, but also for shareholders, investors, suppliers, creditors, banks associated with the activities of this entrepreneur, participating with their own funds in the formation of its authorized capital.

Therefore, planning the optimal amount of profit in modern economic conditions is the most important factor in the successful entrepreneurial activity of enterprises and organizations.

The main indicator of the effectiveness of any type of entrepreneurial activity is profit, which can be predicted after calculating the profitability threshold.

The threshold of profitability is a relative indicator of the volume of proceeds from the sale of products, which covers all existing expenses without making a profit and without incurring losses. That is, financial activity is equal to zero, with the complex use of labor, monetary, and material resources. In most cases, it is expressed using interest, as well as per unit of funds invested in profit.

How to calculate

In order to plan further profits and financial position, it is necessary to calculate the profitability threshold, which all companies strive to exceed. There are several calculation formulas that are expressed in monetary and natural terms, namely:

1. Profitability formula in monetary terms: PR d \u003d V * Z post / (V - Z lane). Where, PR d- threshold of profitability, V- revenue, Z post- fixed costs, determined by the volume of products produced, namely, transportation costs, the purchase of raw materials and materials, Z lane- Variable costs include rent, depreciation, utilities and wages.
2. Profitability formula in physical terms: PR n \u003d Z post / (C - ZS lane). Where, PR n- the threshold of profitability in pieces, C- product price, ZS lane are average variable costs.

An example of calculating the profitability threshold should be given on the basis of a certain enterprise "X", which sells 112 units. finished products, the price for one piece is 500 rubles. Variable costs for the production of one unit are 360 ​​rubles. Fixed costs per unit are 80 rubles, and fixed indirect costs are 36 rubles.

In order to proceed to the formula, it is necessary to determine the total number of variable and fixed costs.

They are calculated as follows:

Z post \u003d (80 + 36) * 112 \u003d 12992 rubles.

V \u003d 112 * 500 \u003d 56,000 rubles.

PR d \u003d 56000 * 12992 / (56000 - 40320),

PR d = 727552000/15680,

PR d \u003d 46400 rubles.

The resulting amount of the profitability threshold indicates that the company, after the sale of manufactured products, will begin to make a profit if it exceeds 46,400 rubles.

PR n \u003d 12992 / (500 - 360),
PR n = 12992/140,

PR n \u003d 92.8 pieces, after rounding it is 93 pieces.

The data obtained indicate that the company will begin to make a profit when the sales volume exceeds 93 pieces.

Threshold of profitability and margin of financial safety

Determining the profitability threshold allows you to plan future investments, for example, to minimize costs in the absence of demand, increase production, operate sustainably and create a certain financial reserve. And also constantly monitor the indicators of its position in the market and develop rapidly.

The margin of financial strength makes it possible to reduce the volume of production, provided that losses are not observed.

It can be determined by subtracting the profitability threshold indicator from the amount of revenue. The higher this indicator is, the more financially stable the company will be. In the event of a decrease in revenue below the profitability threshold, there will be a shortage of liquid funds and the company's financial position will deteriorate significantly.

Based on the indicator of the profitability threshold of the enterprise "X", it is possible to determine the margin of financial strength:

ZFP \u003d V-PR d,

ZPF \u003d 56000 - 46400,

ZPF \u003d 9600 rubles.

It follows from this that the enterprise, without serious losses, can withstand a decrease in revenue by 9600 rubles.

These two indicators are important not only for enterprises, but also for creditors, because on their basis the company can receive the necessary loan.

Profitability threshold

Profitability, in essence, is the profitability or profitability that an enterprise receives as a result of its work.

The main indicators of profitability include:

1. Profitability of the enterprise or balance sheet, is an indicator that shows the performance of an enterprise or industry as a whole.
2. Product profitability, is determined by the ratio of profit from sales to the cost of production or to full costs, and characterizes the result of current costs. It is calculated for all types of products, which allows you to evaluate the activity of production. To date, economists around the world determine the financial condition of enterprises using the profitability ratio, which shows the effectiveness of probable or planned investments.
3. Profitability of sales represents an indicator or coefficient of the share of profit in each earned monetary unit, and is also a certain indicator that affects the pricing policy. It is determined on the basis of the ratio of profit to revenue from the sale of all products.

Profitability Threshold Analysis

The threshold of profitability fully characterizes the work of the enterprise, rather than profit. It shows the overall ratio of resources used and those that are available. Its calculation is used both for evaluating the company's performance, and for future investments and pricing policy.

It should be noted that the profitability indicators of the enterprise, products and sales are calculated on the basis of net profit, proceeds from product sales, as well as balance sheet profit.

How to lower the threshold of profitability

The only way to achieve a lower profitability threshold is to increase the gross margin, that is, marginal income, which is equal to fixed costs at a time of critical sales volume.

In this case, it is necessary:

1. Increase sales volume.
2. Raise the price of products, but within effective demand.
3. Reduce variable costs, such as wages, rent, or utility bills.
4. Reduce fixed costs, which increase the threshold for profitability, and reflect the degree of risk of entrepreneurial activity.

In order for the company to work and develop, it is necessary to correctly combine low fixed costs with a high gross margin. In this case, it is possible to calculate the profitability threshold by dividing the fixed costs by the gross margin ratio.

Profitability threshold (break-even point, critical point, critical volume of production (sales)) - this is the sales volume of the company at which the sales proceeds fully cover all the costs of production and sales of products. To determine this point, regardless of the methodology used, it is first necessary to divide the forecasted costs into fixed and variable.
The practical benefit of the proposed division of costs into fixed and variable costs (the amount of mixed costs can be neglected or proportionally attributed to fixed and variable costs) is as follows:
First, it is possible to define precisely the conditions for a firm to stop producing (if the firm does not recover the average variable costs, then it must stop producing).

Secondly, it is possible to solve the problem of profit maximization and rationalization of its dynamics under the given parameters of the firm due to the relative reduction of certain costs.
Thirdly, such a division of costs allows us to determine the minimum volume of production and sales of products at which the business breaks even (profitability threshold) and to show how much the actual volume of production exceeds this indicator (the financial safety margin of the company).
The profitability threshold is determined as proceeds from the sale, in which the company no longer has losses, but does not receive any profit, that is, the financial resources from the sale after reimbursement of variable costs are only enough to cover fixed costs and the profit is zero.
Break-even point in physical terms for the production and sale of a specific product ( Tb ) is determined by the ratio of all fixed costs for the production and sale of a particular product ( Zpost ) to the difference between the price (revenue) ( C ) and variable costs per unit of product ( Itching. per. ):

Break-even point in value terms is defined as the product of the critical volume of production in physical terms and the price of a unit of output.
The calculation of the profitability threshold is widely used in planning profits and determining the financial condition of the enterprise. Two rules for entrepreneurs:
1. It is necessary to strive for a position where revenue exceeds the profitability threshold, and to produce goods in kind that exceed their threshold value. This will increase the company's profits.
2. It should be remembered that the force of the impact of the production lever is the greater, the closer production is to the threshold of profitability, and vice versa. This means that there is a certain limit of exceeding the threshold of profitability, which must inevitably be followed by a jump in fixed costs (new means of labor, new premises, increased costs of managing the enterprise).
The company must necessarily pass the threshold of profitability and take into account that after the period of increasing the mass of profits, there will inevitably come a period when, in order to continue production (increase in output), it will simply be necessary to sharply increase fixed costs, which will inevitably result in a reduction in short-term profits.
When making a specific decision on the volume of production, the entrepreneur should take into account these conclusions.
Margin of financial strength shows how much you can reduce the sale (production) of products without incurring losses. The excess of real production over the threshold of profitability is the margin of financial strength of the company:
Financial safety margin = Revenue - Threshold of profitability
The margin of financial strength of an enterprise is the most important indicator of the degree of financial stability. The calculation of this indicator makes it possible to assess the possibility of an additional reduction in revenue from sales of products within the break-even point.
In practice, there are three situations that will affect the amount of profit and the financial strength of the enterprise in different ways: 1) the volume of sales coincides with the volume of production; 2) the volume of sales is less than the volume of production; 3) the volume of sales is greater than the volume of production.
Both the profit and the margin of financial safety obtained with an excess of production are less than with the corresponding volume of sales to the volume of production. Therefore, an enterprise interested in improving both its financial stability and financial results should strengthen control over production volume planning. In most cases, an increase in the inventory of an enterprise indicates an excess of production. An increase in stocks in terms of finished products directly testifies to its excess, indirectly - an increase in stocks of raw materials and starting materials, since the enterprise bears the costs for them already when they are purchased. A sharp increase in inventories may indicate an increase in production in the near future, which should also be subjected to a rigorous economic justification.
Thus, if an increase in the company's reserves is detected in the reporting period, it can be concluded that it affects the value of the financial result and the level of financial stability. Therefore, in order to reliably measure the value of the financial safety margin, it is necessary to correct the sales proceeds by the amount of the increase in the company's inventory for the reporting period.
In the last variant of the ratios - with a volume of sales greater than the volume of manufactured products - the profit and the margin of financial safety are greater than with the standard construction. However, the fact of the sale of products that have not yet been produced, that is, in fact, does not yet exist at the moment (for example, with an advance payment for a large batch of goods that cannot be produced for the current reporting period), imposes additional obligations on the enterprise that must be fulfilled in future. There is an internal factor that reduces the actual value of the financial safety margin - this is hidden financial instability. A sign that an enterprise has hidden financial instability is a sharp change in the volume of stocks.
So, to measure the financial strength of an enterprise, the following steps must be taken:
1) calculation of the margin of financial strength;
2) analysis of the impact of the difference in sales volume and production volume through the correction of the value of the financial safety margin, taking into account the increase in the inventory of the enterprise;
3) calculation of the optimal increase in the volume of sales and the limiter of the financial safety margin.
The margin of financial strength, calculated and adjusted, is an important comprehensive indicator of the financial stability of an enterprise, which must be used in predicting and ensuring the comprehensive financial stability of an enterprise.
Operating leverage effect is that any change in sales revenue leads to an even stronger change in profit. The action of this effect is associated with the disproportionate impact of conditionally fixed and conditionally variable costs on the financial result when the volume of production and sales changes.
The higher the share of semi-fixed costs in the cost of production, the stronger the impact of operating leverage.
The strength of the operating leverage is calculated as the ratio of marginal profit to profit from sales.
Marginal profit is calculated as the difference between the proceeds from the sale of products and the total amount of variable costs for the entire volume of production.
Profit from sales is calculated as the difference between the proceeds from the sale of products and the total amount of fixed and variable costs for the entire volume of production.
Thus, the size of financial strength shows that the company has a margin of financial stability, and hence profit. But the lower the difference between revenue and profitability threshold, the greater the risk of losses. So:

• the strength of the impact of the operating lever depends on the relative magnitude of fixed costs;
• the strength of the operating leverage is directly related to the growth in sales volume;
• the force of the impact of the operating leverage is the higher, the closer the enterprise is to the threshold of profitability;
• the strength of the impact of the operating lever depends on the level of capital intensity;

the strength of the impact of operating leverage is stronger, the lower the profit and the higher the fixed costs.