Profitability
refers to the potential of a venture to be financially successful. This may be
assessed before entering into a business or it may be used to analyze a venture
that is currently operating. Although it may be found that one set of factors
is not likely to be successful or has not been successful, it may not be
necessary to abandon the venture. It may instead be feasible to change
operational factors such as pricing or costs.
There
are three basic situations that can describe a business’ financial situation.
It can be profitable, it can break even, or it can operate at a loss.
In most cases, an organization’s goal is to make a profit.
When there is constant or abundant cash
flow,
it can be difficult to determine profitability. It is easy for a person to make
the mistake of linking numerous incoming and outgoing transactions with profit.
Spending and receiving money, however, does not mean a business is in a healthy
financial state.
To determine profitability, it is
necessary to access the price of the goods or services being offered. There are
several things that need to be considered when prices are established. This
includes variable costs such as fuel, labor, and inventory, and it also
includes fixed
costs
such as mortgage, repairs, and taxes.
Yield must also be considered. This refers to the
amount of products or services produced within a certain time frame or from a
certain amount of materials. For example, if a full tank of gas is only
sufficient for two deliveries, the price is likely to be higher than it would
be if a full tank of gas could accommodate six deliveries. If the price for two
deliveries were priced the same as six deliveries, it is likely that
profitability would be jeopardized.
Tracking
profitability may require two things. First, a business will likely need good
and accurate records of its expenses. Second, depending on the size and
complexity of the venture, a person with good accounting skills may be needed
to ensure proper calculations.
There
may be a number of parties interested in the profitability of a particular
venture. For example, sometimes people are owners of businesses but they are
not operators, giving them a reason to be interested in the financial health
and direction of the venture. Stakeholders who have money invested are also
likely to be highly concerned with the profitability of a business. Employees,
especially those at the managerial level, should also care because lack of
profit can threaten job
security and may damage a person’s professional reputation.