Today’s realities are making people increasingly inclined to discuss finances. This applies to both private household budgets and major, global-level investment projects. There is no denying the fact that attention to finances has resulted in the development of innovative methods of analysing them. These range from simple applications that allow us to monitor our day-to-day expenses to huge accounting and bookkeeping systems that support global corporations. The discussions about money also pertain to investment projects in a broader sense. They are very often associated with the implementation of modern technologies, which are implicitly intended to bring even greater benefits, with the final result being greater profit. Yet how do you define profit? And is it really the most crucial factor in today’s perception of business? Finally, how can active noise reduction affect productivity and profit?
What is profit?
The literature explains that “profit is the excess of revenue over costs” [1]. In other words, profit is a positive financial result. Colloquially speaking, it is a state in which you sell more than you spend. This is certainly a desirable phenomenon since, after all, the idea is for a company to be profitable. Profit serves as the basis for further investment projects, enabling the company to continue to meet customer needs. Speaking of profit, one can distinguish several types of it [2]:
- Gross profit, i.e. the difference between net sales revenue and costs of products sold. It allows you to see how a unit of your product translates into the bottom line. This is particularly vital for manufacturing companies, which often seek improvements that will ultimately allow them to maintain economies of scale.
- Net profit, i.e. the surplus that remains once all costs have been deducted. In balance sheet terms, this is the difference between total costs and sales revenue. In today’s world, it is frequently construed as a factor that indicates the financial health of an enterprise.
- Operating profit, i.e. a specific type of profit that is focused solely on the company’s result in its core business area. It is very often listed as EBIT in the profit and loss account.
Profit vs productivity
In this sense, productivity involves ensuring that the work does not harm the workers’ lives or health over the long term. The general classification of the Central Institute for Labour Protection lists such harmful factors as [3]:
- noise and mechanical vibration,
- mechanical factors,
- chemical agents and dust,
- musculoskeletal stress,
- stress,
- lighting,
- optical radiation,
- electricity.
The classification also lists thermal loads, electromagnetic fields, biological agents and explosion and fire hazards. Yet the most common problem is that of industrial noise and vibrations that the human ear is often unable to pick up at all. It has often been the case that concentration decreased while sleepiness levels increased while working in a perpetually noisy environment. Hence, one may conclude that even something as inconspicuous as noise and vibration generates considerable costs for the entrepreneur, especially in terms of unit costs (for mass production). As such, it is crucial to take action in noise reduction. If you would like to learn more about how to combat noise pollution, click here to sign up for training.
How do you avoid incurring costs?
Today’s R&D companies, engineers and specialists thoroughly research and improve production systems, which allows them to develop solutions that eliminate even the most intractable human performance problems. Awareness of better employee care is deepening year on year. Hence the artificial intelligence boom, which is aimed at creating solutions and systems that facilitate human work. However, such solutions require a considerable investment, and as such, financial engineers make every effort to optimise their costs.
Step 1 — Familiarise yourself with the performance characteristics of the factory’s production system in production and economic terms.
Each production process has unique performance and characteristics, which affect production results to some extent. To be measurable, these processes must be examined using dedicated indicators beforehand. It is worth determining process performance at the production and economic levels based on the knowledge of the process and the data that is determined using such indicators. The production performance determines the level of productivity of the human-machine team, while the economic performance examines the productivity issue from a profit or loss perspective. Production bottlenecks that determine process efficiency are often identified at this stage. It is worthwhile to report on the status of production efficiency at this point.
Step 2 — Determine the technical and economic assumptions
The process performance characteristics report serves as the basis for setting the assumptions. It allows you to identify the least and most efficient processes. The identification of assumptions is intended to draw up current objectives for managers of specific processes. In the technical dimension, the assumptions typically relate to the optimisation of production bottlenecks. In the economic dimension, it is worth focusing your attention on cost optimisation, resulting from the cost accounting in management accounting. Technical and economic assumptions serve as the basis for implementing innovative solutions. They make it possible to greenlight the changes that need to happen to make a process viable.
Step 3 — Revenue and capital expenditure forecasts vs. active noise reduction
Afterwards, you must carry out predictive testing. It aims to examine the distribution over time of the revenue and capital expenditure incurred for both the implementation and subsequent operation of the system in an industrial setting.
From an economic standpoint, the implementation of an active noise reduction system can calm income fluctuations over time. The trend based on the analysis of the previous periods clearly shows cyclicality and a linear trend in terms of both increases and decreases. Stabilisation correlates with the implementation of the system described. This may involve a permanent additional increase in the capacity associated with the system’s implementation into the production process. Hence the conclusion that improvements in productive efficiency result in income stabilisation over time. On the other hand, the implementation of the system requires higher expenditures. The expenditure level is trending downwards year on year, however.
This data allows you to calculate basic measures of investment profitability. At this point, you can also carry out introductory calculations to determine income and expenditure at a single point in time. This allows you to calculate the discount rate and forecast future investment periods [1].
Step 4 — Evaluating investment project effectiveness using static methods
Calculating measures of investment profitability allows you to see if what you wish to put your capital into will give you adequate and satisfactory returns. When facing significant competition, investing in such solutions is a must. Of course, the decisions taken can tip the balance in two ways. Among the many positive aspects of investing are increased profits, reduced costs and a stronger market position. Yet there is also the other side of the coin. Bad decisions, typically based on ill-prepared analyses or made with no analyses at all, often involve lost profits and may force you to incur opportunity costs as well. Even more often, ill-considered investment projects result in a decline in the company’s value. In static terms, we are talking about the following indicators:
- Annual rate of return,
- Accounting rate of return,
- Payback period.
In the present case, i.e. the implementation of an active noise reduction system, we are talking about an annual and accounting rate of return of approximately 200% of the value. The payback period settles at less than a year. This is due to the large disparity between the expenses incurred in implementing the system and the benefits of its implementation. However, to be completely sure of implementation, the Net Present Value (NPV) and Internal Rate of Return (IRR) still need to be calculated in the first place. The NPV and IRR determine the performance of the investment project over the subsequent periods studied.
Step 5 — Evaluating effectiveness using dynamic methods
In this section, you must consider the investment project’s efficiency and the impact that this efficiency has on its future value. Therefore, the following indicators must be calculated:
- Net Present Value (NPV),
- Net Present Value Ratio (NPVR),
- Internal Rate of Return (IRR),
In pursuing a policy of introducing innovation in industrial companies, companies face the challenge of maximising performance indicators. Considering the correlation between the possibilities of applying active noise reduction methods that improve the working conditions, thus influencing employee performance, one may conclude that the improvement in work productivity is reflected in the financial results, which has a direct impact on the assessment of the effectiveness of such a project. Despite the high initial expenditures, this solution offers long-term benefits by improving production stability.
Is it worth carrying out initial calculations of investment returns?
To put it briefly: yes, it is. They prove helpful in decision-making processes. They represent an initial screening for decision-makers — a pre-selection of profitable and unprofitable investment projects. At that point, the management is able to establish the projected profitability even down to the operational level of the business. Reacting to productivity losses allows bosses to identify escaping revenue streams and react earlier to potential technological innovations. A preliminary assessment of cost-effectiveness is a helpful tool for making accurate and objective decisions.
References
[1] D.Begg, G.Vernasca, S.Fischer „Mikroekonomia” PWE Warszawa 2011
[2] mfiles.pl/pl/index.php/Zysk
[3] Felis P., 2005: Metody i procedury oceny efektywności inwestycji rzeczowych przedsiębiorstw. Wydawnictwo Wyższej Szkoły Ekonomiczno-Informatycznej. Warszawa.
