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Profitability

Profit is the goal that every business person seeks. Without profit, a business venture cannot exist. Often called the “bottom line,” it is the end product of business activity and the measurement of success of a business venture.

Simply defined, profit is the excess of income (revenue) over costs (expenses). It is computed by using an income statement. Understanding Profitability provides you insight into the concept of profitability and the elements of in income statement. Developing an Income Statement for a Value-Added Farm Business is a detailed description of creating an income statement. Analyzing an Income Statement gives you insights into the financial health of your business.

Business decisions are made based on their effect on profitability. This is true whether the decision involves increasing efficiency, lowering costs, increasing sales, expanding the business, shifting to new products or a host of other business decisions.

The search for profit is a never-ending quest of every business person. For you to be successful in business, you must join this quest. In our rapidly changing business environment, the on-going search for profit is the price you pay for staying in the game. Whatever you did to garner profits yesterday may not be sufficient tomorrow. So you run the race for profits to stay even with your competitors. If you run fast enough, you may even get ahead.

Are You Making a Profit provides you with an overview of profitability and how it is calculated, along with the accounts needed to compute profitability. To keep costs as low as reasonably possible without compromising operations, read Spending Less without Compromising Quality.

For more information on this topic, see the links listed below of articles posted on related Web sites.  Also see the calculators and worksheets available on the Business Workbench.

Profitability

  • Comparative Financial Performance of Agricultural Cooperatives and Investor-Owned Firms – Center for Cooperatives, University of California -- Studies the validity of claims that cooperatives are destroying value.
  • The Profit and Loss Statement: What Does it Mean – Ohio State University Extension -- The Profit and Loss (P&L) Statement is also known as the Income Statement. It shows how well a company buys and sells inventory (or services) to make a profit.
  • Profitability, Will it Make Money? – Agriculture, Food and Rural Development -- Determining profitability may be the most challenging, yet rewarding part of evaluating a new agriculture enterprise.
  • The Hunt for Profits – HBS Working Knowledge -- What's a profit map? It's a shrewd way to conceptualize the relationships among your customers, products, services and transactions. There are five steps to drawing up a profit map.
  • Who's Managing Profitability? – HBS Working Knowledge -- The most important issue facing most managers in this difficult economy is making more money from an existing business without costly new initiatives. Here's how to do it.
  • Will My Business Make Money? – NOLO Law for All – Before you prepare a business plan, you should figure out if your business will break even.

Income Statements

  • Income Statement; A Financial Management Tool – Texas A & M University Extension – Measures the success of the business over a period of time.
  • Introducing The Income Statement – University of Florida Extension -- The income statement and its essential features are outlined in this publication.
  • Income Statement – CCH Business Owner’s Toolkit -- The income statement shows you a summary of the flow of transactions your business has had over the entire accounting period.
  • Income Statement – Small Business Notes -- An income statement shows all income and expense accounts over a period of time.

Cost

  • A Primer on Costs – University of Idaho Extension – Four cost categories are discussed in this publication.
  • Is Activity Based Costing a Blockbuster? – Clemson University Extension – Activity-based costing has been used by organizations with a great deal of success, even though only 20% recorded higher profits.
  • Activity Based Costing– Center for Industrial Research and Service – Allows costs to be apportioned to products by the actual activities and resources consumed in designing, developing, producing, marketing, selling, delivering and servicing the product.
  • Rethinking Activity-Based Costing – HBS Working Knowledge -- Activity-based accounting looks great in the classroom, but too often fails in the field.

Links checked July 2014.

 

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