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Profitability and Profit Margins
Profitability in accounting

Profitability in accounting is the difference between the customer purchase price and the cost of bringing the product or service to market. Profitability ratios report a company’s performance and overall efficiency.  There are several parties interested in the profitability of a company including any investors, lenders, owners, employees, competitors and suppliers as each has a vested interest in the future viability of the company.

Investors want to ensure they receive a return on their investment and that they don’t lose their initial investment.  Lenders like banks that have a stake in the business have lent the business funds to operate or purchase assets and they want to ensure they don’t lose those funds.  The owners are in business to make a profit or a living by doing something they invest their time and energy into.  Employees want to ensure their future is not in jeopardy by dedicating themselves to a company that won’t be around in the future.  Competitors are always watching a business they compete with so they don’t lose their share of the market and by understanding a profitable or unprofitable business they can see what is working or what is not working.  Suppliers have a vested interest in a business they provide goods and services to especially when they have they have extended credit.

One unprofitable business can affect the future of many other businesses and lives.  There are many telltale signs of how well a company is performing without looking at financial statements.  Understanding the signs or knowing the signs is not considered rocket science.  If you have ever been to a business where the service was so bad you wondered how the owners were still in business you have likely been to a business that didn’t care about profitability.  A business that mistreats their employees doesn’t understand the impact their employees have on profitability.  A lack of products, overpriced products for the market the business is serving, a poor location, an unappealing space all have an impact on profitability.  A business name can also negatively impact the profitability of the business.

Although you cannot tell how profitable a business is you can see the effects of a business that is under performing.  A business may seem to be doing well but it may owner investment that is carrying a company and not the customer sales.  For any business to succeed a demand for products or services is required.  The margin of profitability is determined by many factors some directly requiring an outlay of funds and others that have a direct relationship to generating more sales.  Whether it’s increasing sales or reducing costs there are many variables involved in the overall profitability of a business it’s not always as simple as buying a widget for $1 and selling it for $2.

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