Personal Finance and Investing

For any business the main goal of its activity is to get profit. Profit is one of financials performances of a company and an evidence of its success, which is achieved if the income exceeds the expenses. In the opposite case, the company receives loss. Profit growth determines the potential growth of the company, increases its business activity. Depending on profit they determine the income share between the founders and owners, the size of dividends and other income. Profit is also used to calculate the return on equity and debt funds, fixed assets, the total advanced capital, and each stock. But profit is not only a primary objective of any commercial organization, but also the most important economic category.

As an economic category, a company’s profit reflects the net income generated in the material production sphere. For the enterprise level, the net income takes the form of profit. 

Profit as an economic category performs certain functions. Profit characterizes the economic benefit derived from the activities of enterprise. Profits presence in a company means that its income exceeds all expenses related to its activities. 

Profit has catalytic function, while acting as a financial result and the key element of enterprise’s financial resources. A part of net profit, after paying taxes and other obligatory payments, remains at the company disposal, and it should be sufficient to finance the expansion of industrial activity, for technological and social development of the company, and tangible incentives for workers.

To assess the effectiveness and feasibility of the enterprise, it is not enough to determine only absolute indicators. A more objective picture can be obtained using profitability indicators. Profitability indicators are relative characteristics of financial results and performance of the enterprise. 

The term “profitability” has its origin from the rent, which literally means income. Thus, the term “profitability” in broad sense refers to yield, revenue performance and efficiency.

Profitability indicators are used for comparative assessment of individual businesses performance and industries that produce different amounts and types of products. These indicators characterize the profits in relation to expended productive resources. The most commonly used indicators such as production profitability and product profitability. 

Products profitability (profit rate) is the ratio between the total profit and the cost of production and sales.

Production profitability shows the ratio between the total profit and the average value of fixed and normalized working capital.

In conclusion there is a big difference between profit and profitability, and of course this difference makes all the sense in a business. But even so, these two concepts are very closely related because the increase of profitability brings to profit mass increase, to the reduction of products costs and improve the use of production assets.

Tags: Catalytic Function, Financial Result, Material Production

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