Profit and profitability are two very distinct things. Often used interchangeably, these business terms are closely related. Yet, they represent two diverse business aspects. Your Brisbane bookkeeper or accountant can well discuss to you the difference and similarities of the two. Here is a brief and generalised discussion of profit versus profitability.
What is Profit?
Profit is the positive outcome of a business cycle or venture. It is what remains of the revenue after all costs and expenses are deducted. It is often measured and expressed in dollars. If a company recorded a sales of $20,000, cost of goods sold of $12,000, and overall expenses of $2,000, it has a profit of $6,000.
What is Profitability?
Profitability is the measure of your asset efficiency. It determines the expected return of investment. It measures the amount of investment needed in order to achieve a certain amount of profit. Profitability is often expressed as a ratio or percentage. It can be measured using the equity, capital used, or investment. A company with 5% profitability will generate $5,000 net profits for every $100,000 equity.
Profit vs Profitability: The Business Significance
Looking into profits alone can be misleading. The end numbers are not enough to tell the whole story. It is not enough to determine the performance of the enterprise.
Profitability will give you a better idea on how the business doing. It directly measures how efficient the business is on using its assets.
Let us take the case of two different companies and compare.
Awesome Enterprises determines business performance based on their net profits. In 2014, they recorded a total revenue of $500,000, total costs of goods sold of $350,000, and business expenses amounting to $50,000. The company has a net equity of $750,000.
Better Company reported is using profitability to measure the performance. In 2014, they recorded a total revenue of $300,000, total costs of goods sold of $150,000, and business expenses amounting to $60,000. The company has a net equity of $500,000.
Awesome Enterprises earned a net profit of $100,000 ($500,000 – $350,000 – $50,000), while Better Company earned $90,000 ($300,000 – $150,000 – $60,000). A cursory look into their income statements, it looks like Awesome Enterprises is doing better than Better Company. It has higher revenue and profit.
But, if we consider the equity of the amount invested into the company, Awesome Enterprises has a 13.33% ($100,000 / $750,000) profitability and Better Company has 18% ($90,000 / $500,000) profitability. From a Brisbane bookkeeper’s point of view, this means that for every dollar invested Awesome Enterprises is earning 13.33 cents while Better Company is earning 18 cents. Therefore, Better Company is performing better because it is using its assets more efficiently.
If both companies have $1,000,000 equity and all factors remain constant, you can expect $133,330 profit from Awesome Enterprises and $180,000 from Better Enterprises.
Both profit and profitability are measures, and using either will not affect your business performance. However, it will give you a better idea on how money invested is being used and is generating income. This is very helpful when investing or deciding on two or more business opportunities. Considering all the angles of your business and work with people who will complement your needs. A lawyer, a financial analyst, or an experienced bookkeeper in Brisbane can help you better assess your business performance.