Profit Vs Profitability | Why You Need to Track Profit Margin?

Profit vs profitablity

You must be wondering is it really beneficial that you need an MBA in order to increase your company profits? Well, the answer to this is you actually, “Don’t really need an MBA!”

In fact, in order to increase your profits, you need to take care of two basic ways:

  1. Increase Revenues
  2. Reduce Costs

The smartest businesses always implement new marketing strategies and cost-cutting measures that eventually takes care of your Bookkeeping Services. But far too many obsess so much over increased sales that they tend to forget about the main importance of trimming the fact and end up actually reducing profits. It’s a fact that it is highly critical for businesses to keep track not only on the “Profit” but also “Profit Margin”.

While profits are usually measured in “Dollars”, the profit margin, on the other hand, is measured as a “percentage”, or “ratio”, to be more precise, the ratio between net income (profit) and total sales.

Continuing the example above:

Company A has $100,000 in net revenue and generates $1million in total sales, so its profit margin is 100,000/1,000,000 or 10 percent.

Company B also generates $100,000 in net revenue, but its total sales are $500,000, making the profit margin 20% (100,000/500,000). The two companies have the same amount of profit, but Company B is twice as profitable as Company A.


Profit Vs Profitability:

Profit and profitability are two terms that are often used interchangeably, however, they are not the same. The clarification of both terms is different and those who are able to interpret them correctly can expect to witness the financial success of a company.

Difference between profit and profitability

To determine whether a company is financially sound or not, business owners and investors need to keep a track of the company’s profit from its profitability.

To keep the business afloat, you need to always ensure a smooth working capital and cut business costs and expenses as much as possible.

In simplest terms, whatever amount is left after subtracting the total expenses from the total revenues is profit.

Similarly, the profit margin is the ratio between the net income and total sales as it is measured as a ratio or percentage.


How to increase Profit Margin with Profit vs Profitability?

Well, the reason is that because profit margin more accurately reflects long-term profitability and a business’s vulnerability to sudden increases in fixed costs (such as insurance, office expenses, and taxes), hence, it’s important to track profit margin and implement strategies, which keep it as high as possible.

There are basically two ways to increase a company’s profit margin.

  • First, you can increase the price you charge for your products and services, but this must be done only after a careful analysis of the impact of those increased prices on consumer behavior and total sales.
  • The second and much safer approach is to control costs.

Why Is It Important to Differentiate Between Profit and Profitability?

It’s a universal truth that the greater the gross profit margin, the more profitable the company is before consideration of general and administrative expenses.

The following are the listed points that prove the significance of the gross profit margin:

Running Expenses

  • The gross profit margin decides expenditure to cover running costs. And still, leave a profit for the business owner.
  • Stated differently, the gross profit margin reflects the difference between the costs of production and product revenue.
  • The greater the gross profit margin, the greater the revenue left to absorb operating costs and make a profit.

Profitability

  • Maintaining records that keep track of a company’s gross profit margin helps the business owner in tracking profitability trends.
  • A company’s gross profit, calculated as revenue less cost of goods sold, may increase over time.
  • However, due to changes in revenue and fluctuations in both variable and fixed costs, the gross profit margin is a better indicator of profitability.

Product Pricing

  • To assist a business owner with product pricing we can use Gross-Profit margins.
  • Knowing the costs of production for a specific product, a business owner can determine what profit he wants to make and determine the sale price required to generate that profit.
  • We need to consider demand, competition, and demographic factors.

Industry Benchmarks

  • Companies use various ratios to compare themselves to competitors and industry standards. Nowadays, most of the business firms are using Virtual Bookkeeping Services. As it takes care of their Accounting Services and Bookkeeping Services.
  • We use the Gross-Profit as a ratio to analyze.
  • It helps to determine the financial health of the company.
  • Companies that fall below industry benchmarks need to either increase the sale price or lower the costs associated with production without sacrificing product quality. Also, as a matter of fact, it might leave a negative impact on their Accounting and Bookkeeping Services.

Future Planning

  • Gross profit margin is a useful tool to plan the future operations of a company.
  • Since gross profit margin considers revenue and production costs. Thereby, forecasting future revenues or costs and determining the related gross profit will help indicate overall profitability.
  • Using the gross profit margin, a company can develop different scenarios before implementing changes.

What Are the Similarities Between Profit and Profitability?

Even if they have similar names, they don’t have much in common from what they tell you.

The profit measures how much money a business is earning.

Profitability, on the other hand, measures how efficient that business is.

Of course, both numbers tell you something, but in the world of finance, profitability is much more important than profit.

Conclusion:

It’s a fact that no single strategy is likely to increase a company’s profitability or prospects for long-term success.

In fact, the most successful companies carefully evaluate consumer behavior to determine the best price to charge for products. While simultaneously researching a range of fixed cost-cutting strategies, ranging from outsourcing non-critical job functions to downsizing. Then, carefully researching health care options for their employees. An encyclopedic analysis of both price and careful cost-cutting measures has the aid of increasing a company’s profitability.

To get started and know more with regards to our services you need to get in touch with one of our expert advisors from Accounts Confidant Team, please call us today at +1-866-301-2307.

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