The Importance of Profitability
- Profit is what a firm earns once the total costs have been deducted from the total sales revenue
- Profitability is a measure of how successful a business is
- Profitability can be defined in two ways
- A measure of how effectively a business converts sales revenue into profit - effectively, what percentage of sales revenue is profit
- A measure of how well capital resources invested in the business generates profit
- Profitability is expressed in percentage form, which allows comparison of business performance over time and also comparisons with other businesses
- Several stakeholders are interested in profitability
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Investors look carefully at profitability when deciding which business to invest in
- The higher the level of profitability, the higher their rewards are likely to be
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Directors and managers consider profitability when assessing business success and determining future objectives and strategy
- Employees may consider profitability as justification for requesting higher wages or better working conditions
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