Profitability

Examples of Profitability in the following topics:

• For-profit marketing versus nonprofit marketing

  • As the terms connote, the difference between for-profit and nonprofit marketing is in their primary objective.
  • For-profit marketers measure success in terms of profitability and their ability to pay dividends or pay back loans.
  • Continued existence is contingent upon level of profits.
  • Nonprofit institutions exist to benefit a society, regardless of whether profits are achieved.
  • While they are allowed to generate profits, they must use these monies in specific way in order to maintain their non-profit status.

• Profitability Ratios

  • Profitability ratios show how much profit the company takes in for every dollar of sales or revenues.
  • Profit Margin: The profit margin is one of the most used profitability ratios.
  • The profit margin refers to the amount of profit that a company earns through sales.
  • The profit margin ratio is broadly the ratio of profit to total sales times one hundred percent.
  • The higher the profit margin, the more profit a company earns on each sale.

• Profit and Value

  • Profit is equal to a firm's revenue minus its expenses, while value is the present value of the firm's current and future profits.
  • A) The value of a firm is the sum of its expected profits; B) The value of a firm is the sum of the PV of its current and future profits; or C) The value of a firm is its current profit.
  • Normal profit represents the total opportunity costs (both explicit and implicit) of a venture to an investor, whereas economic profit is the difference between a firm's total revenue and all costs (including normal profit).
  • The value of a firm is linked to profit maximization.
  • Profit is equal to a firm's revenue minus its expenses, while value is the present value of the firm's current and future profits.

• Profitability analyses (e.g. by customer, product, region)

  • One of the most important of these is profitability analyses.
  • "Although CP is nothing more than the result of applying the business concept of profit to a customer relationship, measuring the profitability of a firm's customers or customer groups can often deliver useful business insights.
  • Although this is a natural consequence of variability in profitability across customers, firms benefit from knowing exactly who the best customers are and how much they contribute to firm profit.
  • These unprofitable customers actually detract from overall firm profitability.
  • With this information in hand, a customer profitability analysis can be prepared.

• Net Income

  • Net income is a distinct accounting concept from profit.
  • Profit is a term that means different things to different people, and different line items in a financial statement may carry the term "profit," such as gross profit and profit before tax.
  • As profit and earnings are used synonymously for income (also depending on United Kingdom and U.S. usage), net earnings and net profit are commonly found as synonyms for net income.
  • Net sales (revenue) – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense = Net income (EAT)

• Disadvantages of Corporations

  • In many countries, corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate -- double taxation.
  • You decide to set up a corporation and have a profit of $1,000,000 in the first year.
  • Suppose the government taxes corporate profits at 30%, then the corporation has to pay $300,000 in taxes.
  • This is the concept of double taxation: first the company was taxed for its profits, and later shareholders were taxed for their dividends.
  • In many countries, corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate.

• Profit Optimization

  • Firms utilize strategies such as price and promotional reduction to minimize cost, maximize revenue, and thereby optimize profits.
  • Traditional profit optimization includes methods for reduction of pricing, promotional, and markdown losses.
  • Yield management can help firms optimize profits.
  • Revenue optimization is a method of determining 'optimal' profits or expenditures, and can be related to quadratics, as the vertex of a parabola can illustrate the point where the ‘maximum' revenue can be attained.
  • This method is effective for maximizing profits for companies and families, as it can ensure the highest profit for sales and the lowest amounts for expenditures.

• Return on Investment

  • Return on investment (ROI) is one way of considering profits in relation to capital invested.
  • Return on investment (ROI) is one way of considering profits in relation to capital invested.
  • Marketing not only influences net profits but also can affect investment levels too.
  • For a single-period review, just divide the return (net profit) by the resources that were committed (investment):
  • Return on investment (%) = Net profit ($) / Investment ($) × 100

• Cost-Based Pricing

  • It is primarily used because it is easy to calculate, requires little information, and allows them to maximize their profits.
  • A firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price.
  • Cost-plus pricing is a method used by companies to maximize their profits.
  • It is a way for companies to calculate how much profit they will make.
  • Therefore, cost-plus pricing is often considered the most rational approach in maximizing profits.

• The Goals of a Business

  • The primary purpose of a business is to maximize profits for its owners or stakeholders while maintaining corporate social responsibility.
  • According to economist Milton Friedman, the main purpose of a business is to maximize profits for its owners, and in the case of a publicly-traded company, the stockholders are its owners.
  • Many observers would hold that concepts such as economic value added are useful in balancing profit-making objectives with other ends.
  • This chart depicts profit maximization using the totals approach, where TR = Total Revenue and TC = Total Cost.
  • The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.