Benefits and Profitability

The benefits and profitability were to walk one day, more could the income you had ... well, and so goes the story, profit is the gasoline that moves a company, not so much as the ultimate motive of its shareholders or owners, But, as the necessary source of constant energy that is required, to continue with their movements.Rise school is Best School of Accountancy in Lahore.CA admissions in Lahore now open. The best School of Accountancy in Pakistan offers CA in Lahore and Best CA in Pakistan.

 However, it is profitability, which makes it attractive. Without benefits there is no company, no rent, and no attraction. Well, let's briefly study both and give simple formulas to measure them.

To determine what is the profit and what is the profitability, we must start by defining the first, the benefit, is understood as the net income of the company less costs, in a given period of time. Usually, it is called Gross Profit, to obtain the Net Profit.

Before giving an example of the concept of benefit, it is necessary to review the concept of costs, so, I recommend to review this link on Costs (Costs of a venture).

Now if my sum costs are $ 10 and my income is $ 20, I have a profit of $ 10. Yes, but that does not mean that you have enriched $ 10, since once the gross profit is determined, you must subtract other costs associated with money itself, that is, opportunity cost, interest (in case of coming from a Credit) and inflation. These three points, the cost of money, will be discussed in a later article.

Another important aspect to understand the concept of profit and profitability is not to confuse the so-called cash flow with the gross profits, since the former refers to all the net income obtained by the company, at a given time, For any cause (that includes the sale of assets, such as a refrigerator or a local), that means that it is not necessary to complete a commercial process (production, transportation, sale and payment) to obtain it, whereas, The culmination of a commercial process, which includes the payment of the customer.

Remember that at the industrial level, it is common to give credit to the customer, which maintains two separate accounts: the invoiced (sold at paper level) and collected (accounts paid). The subtraction of both produces the dreaded accounts receivable, which represent money obtained with higher costs (both of opportunity and for the effects of making them effective) by the employer.

Then, as I determine the profitability of a given period, there is a classic formula, on the financial return on investment, usually calculated for average periods (6 months minimum): Gross Profit / Capital invested.

Example, in those 6 months, 4 salaries (x6), public services, taxes, raw material, rent, equipment purchase (or partial payment), etc. were paid. That will be the so-called invested capital, and it is the dividend of gross profits. The result is measured in percentages.