Answer to Question #172540 in Economics for Phindile

Question

Companies today are continually seeking innovative ways to further accelerate improvement initiatives and increase value and operating profits across the enterprise. Many companies have invested heavily in extensive operational excellence programs. They have “Leaned” their organizations, trained their workforce and enlisted an army of Six Sigma black belts to drive continuous improvement. While there are numerous success stories, executives can’t afford to rely solely on these tried and tested methods; they need to look for new ways to drive competitive advantage which take integration and collaboration to the next level.

Risk factors

As the leaders in an integrated ecosystem, there are inherent risks in not fully understanding the complexity of roles, and the interdependencies of key processes. Innovative companies are realizing they must leverage optionality within their company and with their partners.

 

Answer 1

Operating profit shows how much the efficiency of the enterprise has increased. It takes into account the costs of selling products (also known as sales profit). So, from the gross profit, you need to subtract the costs of commerce and product management.

The world economic system is heading towards globalization. At the accounting level, this is reflected in an attempt to make all estimates as homogeneous as possible across enterprises. This is evidenced by the emergence in our market economy of a new calculated parameter - EBIT (otherwise - operating profit). The indicator was developed on the basis of British and American accounting principles (GAAP system). The advantage of the new parameter is that it describes the company's performance in the global market.

Operating costs are:

depreciation expenses;

fuel costs;

payment of credits, loans;

expenses from the write-off of fixed assets (not including cash);

costs of using intellectual property.

The increase and decrease in operating profit depend on the activities of the enterprise. First, you need to calculate the volume of goods that will provide an increase in operating profit (for the period). This state of the enterprise is described by the break-even point. This parameter is achieved if the number of operating income is equal to the number of operating payments.

The break-even points are different for the short and long term. This is due to the fact that variable costs, in the long run, are less than in the short run. The difference is achieved through the efficient use of resources. In the long run, the amount of fixed costs is also higher (due to a gradual increase in production volumes).

The next step is to calculate the number of goods that need to be sold in order to achieve the planned profit. If the production process has already begun, calculate the profit taking into account the available sales of the product.

In order for the enterprise to observe an increase in operating profit, it is necessary to prevent running into a deficit. An important parameter of a company is a margin of safety. It determines the volume of sales of goods required to maintain the enterprise at a profitable level. The safety factor is taken into account when assigning the cost of goods.

Next, it is necessary to calculate the possibilities of increasing operating profit while reducing fixed and variable production costs.

Careful accounting calculations will allow you to trace the dynamics of operating profit, as well as change its indicators for the better. In this case, all parameters of the company are taken into account (purchase of equipment, payment of salaries to employees, rent of retail and warehouse premises, etc.). When forming operating profit, it is necessary to take into account the ideal volume of sales of goods, as well as possible ways to increase sales.