Corporate Target: Profitability

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However beautiful the strategy, you should occasionally look at the results. – Churchill

Operating result determines the continuity

The company is a “system” that aims to to achieve a positive operating result (profit before interest and tax deductions)

Turnover of assets; important benchmark

In order to generate an annual turnover, the company has invested money in property, plant, machinery, inventory, inventories, receivables, etc.

This property must be active deployment and yield an acceptable annual turnover. If the assets are used inefficiently than the annual turnover remains proportionately behind and brings the profitability of the company at risk. The turnover rate is an excellent tool to determine whether the company deploys the assets at its disposal efficiently. The norm for the turnover is between 1.5 and 2.5 times annually.

Above, you see the financial ratios and standards schematic illustrated.

Steering with financial ratios

On track with financial ratios


Any company can be analysed using ratios whether it is profitable.

In addition, with the ratios the strength and the weakness of a company are determined. How effective is the company with the total assets? In addition, with the ratios the strength and the weakness of a company can be determined. How effective is the company’s total assets? How effective is the company in managing the production and general costs? What is the profitability of the company? Questions that need to answered, in order to be able to steer the company financially.

Effective production process is a healthy gross profit

The gross profit of the company is the difference between the annual turnover ex. VAT and production costs plus depreciation.

Gross profit is positively or negatively influenced by whether or not control of production costs. The standard gross margin indicates how effectively the company manufactures its products and is an important step towards a positive result. The standard gross margin is between 20 and 30% of annual sales ex. VAT.

Operating profit is required for the continuity of the company

Operating profit is required

A positive operating result is the objective of each company.

A positive operating result, either the profit from business activities, ensures the continuity of the company. If the company achieves insufficient or negative results, the continuity of the company in danger and there is a strong likelihood that the company goes bankrupt. The operating result is achieved by subtracting from the
Gross profit the General costs. If the Gross profit meets the standard, but the operating profit remain behind then there is something fundamentally wrong with the General cost. The standard for operating profit is between 4 to 10% of annual sales ex. VAT.

Example objectives profitability: these examples you could use in your business plan.

  • The company aims a turnover rate of total assets .. times a year to achieve.
  • The company’s goal is a gross margin of .. % annually to achieve.
  • The company aims to operating profit (profit margin) of .. % annually to achieve.
  • The company’s goal is a return on total assets (ROA) of .. %annually to achieve.
  • The company’s goal is a return on equity (ROE) of .. % annually to achieve.

Profitability

Securing profitability is meet profitability standard

The minimum requirement is a that your company has sufficient capital to pay your creditors.

The profitability of the company is represented by means of indicators. Here you can see whether the capital made available is used effectively. Through the profitability calculation you get insight into what each dollar invested yields ultimately. Is the yield per dollar invested over a longer period insufficient investors are not willing to invest their money in the company which makes the existence of the company at risk. The profits of the enterprise over time must be large enough to to pay investors dividends or interest.

How big is your own equity? How much loan capital does the your company have? How much stock has the enterprise? How much money stands out among the debtors? How much money should the creditors still received?

Above shows schematically how the financial flows relate to each other.

Return on total assets (ROA)

This is the gross profit, before interest and taxes as a percentage of total invested capital (equity and debt capital). This indicator excludes the impact of a large or small equity loan. The standard (ROA) is between 8 to 13%. Because it is based on the gross profit, this prefix also a good idea of ​​the production cost.

Return on equity (ROE)

This is the net profit as a percentage of equity. It is the indicator of the profitability of the company. The return on equity shall not be less than 2 to 3%..