Role of operating profit analysis in management
Operational analysis is an integral system of profit. It can be viewed as a means of justification and selection options increase profits. It allows you to predict changes in financial and economic performance caused by dynamic changes in market conditions. Underlying operational analysis is evaluating the impact of changing one of the elements of operating leverage in financial and business enterprises.
The volume of profits and the possibility of increase depends on many factors. The object of our consideration is the volume of sales and cost structure of sales, as these factors affect the profit simultaneously.
Consider the method of justification decision to increase profits at a given value by:
- Increase sales;
- Reducing fixed or variable costs without changing sales.
Increased sales in turn can be achieved by:
• increase physical volume of production;
• raising prices without changing the physical output.
Use these opportunities to increase profit by uneven degree of difficulty in the practice of production.
Operational analysis enables scenarios to justify the behavior of enterprises in terms of adverse changes in market conditions. If a company gets into a situation that requires a reduction in sales to the minimum necessary, it is important to determine, due to which implementation will decrease. The choice depends on the specific reasons that necessitate lower sales:
1. The reduced demand for products. In this case, you can reduce prices to stimulate it, without changing the physical output.
2. reduced range of consumers. It is necessary to reduce the volumes of production.
3. dropped in production capacity, while products are in demand among consumers. This would reduce the physical volume of production and sales.
Thus, the reduction or possible sales by reducing prices or by reducing the physical volume of production and sales. Comparison of these ways
An important area of application is the analysis of the operational assessment of the impact on operating income changes one of the elements of operating leverage (price, variable or fixed costs) through sales calculations. This assumes that the amount of profit remains unchanged, but changes the volume of sales, which is to ensure that permanent income. For calculations using the formula:
As a result, operational analysis by this method can calculate how much the company must increase sales volumes at lower prices or higher costs for a given value to compensate for loss of income or how much the company can reduce sales volumes without loss of profits by raising prices or reducing costs the set value.
This method of analysis enables to distribute items return (price, cost of sales) in the degree of their impact on profit. Thus, operating profit analysis provides financial managers the tools to justify the tactics and strategies of profit.