Profitability analysis of small and medium enterprises in india
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In Part 1 of 'SME Financial Management Fundamentals', we discussed Balance Sheet aspects that SME business owners can use for measuring financial health. Now we look at aspects of profitability that can help to judge how well a business is being run and to identify areas for improvement.
A business is run for profits, everyone acknowledges that. However, the absolute amount of profit is not the sole metric to focus on. Other important aspects such as solvency, margins, liquidity, and return on capital are often overlooked or are left only to bank credit officers to analyse at the time of a loan application. As the proverb goes, 'It is unwise to go digging a well when there's a fire', it would make sense for all businesses, big and small, to have at least an elementary focus on analysing profitability.
Variance analysis


TOP NEWS
SME Sector
Profitability analysis for SMEs- Know how well your business is doing
Variance analysis helps to track how a business is performing in comparison to earlier periods and identifying areas for deeper analysis or scope for improvement.
By Ujval Nanavati, ET CONTRIBUTORS | Updated: Mar 31, 2017, 02.18 PM IST
View in App
Lower costs, improved long-term business health, higher returns, and a business that is attractive for lenders and other investors - financial management is the key ingredient for all of these.
In Part 1 of 'SME Financial Management Fundamentals', we discussed Balance Sheet aspects that SME business owners can use for measuring financial health. Now we look at aspects of profitability that can help to judge how well a business is being run and to identify areas for improvement.
A business is run for profits, everyone acknowledges that. However, the absolute amount of profit is not the sole metric to focus on. Other important aspects such as solvency, margins, liquidity, and return on capital are often overlooked or are left only to bank credit officers to analyse at the time of a loan application. As the proverb goes, 'It is unwise to go digging a well when there's a fire', it would make sense for all businesses, big and small, to have at least an elementary focus on analysing profitability.
Variance analysis
Variance analysis helps to track how a business is performing in comparison to earlier periods and identifying areas for deeper analysis or scope for improvement. Sales variance analysis is the most common. A properly done sales variance analysis goes much beyond merely looking at the absolute or percentage variance. A good example is 'Price:Volume' variance, which can be explained using some simple numbers:
Suppose that a mid-sized widget maker has seen sales increase from Rs15.4 lakhs in 2016 to Rs18.3 lakhs in 2017. Saying that sales variance is Rs2.9 lacs or 18.8%, would be stating the obvious. This variance needs a deeper analysis in order to be meaningful. Let's say we have the following additional data to help us.
Margin / Profitability analysis
Given the primary profit motive of a business, analysing margins is a very important part of financial management. This analysis can be split to granular detail that goes beyond just the bottom line. Some of the common metrics are:
Gross Margin: This is sales minus the cost of goods sold (COGS) as a percentage of sales. COGS includes all costs directly related to bringing the goods into a saleable state. This would mean all direct labour, inward shipping, raw material costs, and factory overheads linked to production.
Contribution Margin: This is an important element that often gets overlooked. Contribution Margin is Sales less all variable costs of production and running the business. Variable costs, by definition, vary with the level of production or sales. Examples include raw material, power & fuel, tools & spares, etc. Hence, Contribution Margin can be seen as the amount available to meet all fixed costs - examples include office/factory rent, administrative salaries, property taxes, etc. - and profits.
EBITDA Margin: This can be thought of as the cash margin. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortisation, is the amount left over after meeting all fixed and variable expenses to meet funding costs, amounts required for replacement of assets, and profits.
Net Margin: The most commonly understood, Net Margin is the amount left over for distribution or reinvestment into the business for growth after meeting all expenditures, allowances, financing costs, and depreciation.
'Common Size Statement' is a popular tool used for translating the above analysis into an easy to understand format that can also be used for a quick comparison between periods. In this statement Sales / Turnover / Revenue is used as a base of '100' and every line item is expressed in relation to this.
A business is run for profits, everyone acknowledges that. However, the absolute amount of profit is not the sole metric to focus on. Other important aspects such as solvency, margins, liquidity, and return on capital are often overlooked or are left only to bank credit officers to analyse at the time of a loan application. As the proverb goes, 'It is unwise to go digging a well when there's a fire', it would make sense for all businesses, big and small, to have at least an elementary focus on analysing profitability.
Variance analysis


TOP NEWS
SME Sector
Profitability analysis for SMEs- Know how well your business is doing
Variance analysis helps to track how a business is performing in comparison to earlier periods and identifying areas for deeper analysis or scope for improvement.
By Ujval Nanavati, ET CONTRIBUTORS | Updated: Mar 31, 2017, 02.18 PM IST
View in App
Lower costs, improved long-term business health, higher returns, and a business that is attractive for lenders and other investors - financial management is the key ingredient for all of these.
In Part 1 of 'SME Financial Management Fundamentals', we discussed Balance Sheet aspects that SME business owners can use for measuring financial health. Now we look at aspects of profitability that can help to judge how well a business is being run and to identify areas for improvement.
A business is run for profits, everyone acknowledges that. However, the absolute amount of profit is not the sole metric to focus on. Other important aspects such as solvency, margins, liquidity, and return on capital are often overlooked or are left only to bank credit officers to analyse at the time of a loan application. As the proverb goes, 'It is unwise to go digging a well when there's a fire', it would make sense for all businesses, big and small, to have at least an elementary focus on analysing profitability.
Variance analysis
Variance analysis helps to track how a business is performing in comparison to earlier periods and identifying areas for deeper analysis or scope for improvement. Sales variance analysis is the most common. A properly done sales variance analysis goes much beyond merely looking at the absolute or percentage variance. A good example is 'Price:Volume' variance, which can be explained using some simple numbers:
Suppose that a mid-sized widget maker has seen sales increase from Rs15.4 lakhs in 2016 to Rs18.3 lakhs in 2017. Saying that sales variance is Rs2.9 lacs or 18.8%, would be stating the obvious. This variance needs a deeper analysis in order to be meaningful. Let's say we have the following additional data to help us.
Margin / Profitability analysis
Given the primary profit motive of a business, analysing margins is a very important part of financial management. This analysis can be split to granular detail that goes beyond just the bottom line. Some of the common metrics are:
Gross Margin: This is sales minus the cost of goods sold (COGS) as a percentage of sales. COGS includes all costs directly related to bringing the goods into a saleable state. This would mean all direct labour, inward shipping, raw material costs, and factory overheads linked to production.
Contribution Margin: This is an important element that often gets overlooked. Contribution Margin is Sales less all variable costs of production and running the business. Variable costs, by definition, vary with the level of production or sales. Examples include raw material, power & fuel, tools & spares, etc. Hence, Contribution Margin can be seen as the amount available to meet all fixed costs - examples include office/factory rent, administrative salaries, property taxes, etc. - and profits.
EBITDA Margin: This can be thought of as the cash margin. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortisation, is the amount left over after meeting all fixed and variable expenses to meet funding costs, amounts required for replacement of assets, and profits.
Net Margin: The most commonly understood, Net Margin is the amount left over for distribution or reinvestment into the business for growth after meeting all expenditures, allowances, financing costs, and depreciation.
'Common Size Statement' is a popular tool used for translating the above analysis into an easy to understand format that can also be used for a quick comparison between periods. In this statement Sales / Turnover / Revenue is used as a base of '100' and every line item is expressed in relation to this.
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Explanation:
A positive aspect of increased globalization for a small business is they can often have a greater impact with their product or 'message'. A paving stone to globalization is the efficient connectivity of businesses and consumers worldwide by communications (internet) and shipping routes (cargo flights).
·Long-term thinking, perspectives
·Stability
·No pressure for short-term success
·High identification with the business, stable culture
·High commitment.
hope it helps ☺️☺️
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