WHAT IS THE DIFFERENCE BETWEEN PROFITABILITY AND PROFIT: For those of us who are starting a business or are already in one, it is very easy to confuse the concept of profitability with profit (profits) and vice versa, that is why I have decided to investigate and share the following information .
Value of the product sold, discounting the cost of inputs and depreciation, payments to the contracted factors, such as wages, interest and rent. Therefore, the profit is the implicit compensation to the factors contributed by the owners of a business or a company.
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Profit, profit or economic benefit obtained by a company in the course of its operations. The word also serves to designate, in a more concrete sense, the difference between the price at which a product is sold and its cost. Profit is the basic objective of every company or business that must make use, therefore, of the optimal combination of productive factors to reduce its costs as much as possible, while attracting the demand for the goods or services it produces to sell these at the highest obtainable price, this is part of what is the difference between profitability and profit.
Profitability is the ability of something to generate sufficient profit or profit; For example, a business is profitable when it generates more income than expenses, a client is profitable when it generates more income than expenses, an area or company department is profitable when it generates more income than costs.
But a more precise definition of profitability is that of an index that measures the relationship between the profit or profit obtained, and the investment or resources that were used to obtain it. To find this profitability we must divide the profit or profit obtained by the investment, and multiply the result by 100 to express it in percentage terms.
(Profit or Profit / Investment) x 100
For example: Imagine that we invest $ 1500 in an asset and then we sell it for $ 2000, applying the formula: (2000 – 1500/1500) x 100, we can say that the investment gave us a return of 33.33% or, in other words, the investment or capital had a variation of 33.33%.
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The term profitability is also used to determine the relationship that exists between the profits of a company and various aspects of it, such as sales, assets, equity, number of shares, etc. In this case, to find this profitability, we simply have to divide the profits by the value of the aspect we want to analyze, and multiply the result by 100 to convert it into a percentage.
For example: If we have sales for $ 1300 and in the same period we have obtained profits for $ 400, applying the formula: (400/1300) x 100, we can say that the profitability of the company with respect to sales was 30.77% or, In other words, the company’s profits represented 30.77% of sales.
Remember that profitability and utility are two different and complementary concepts.
The utility is simply the name that is given to a resulting value after subtracting all the expenses from the income, for example: From the sale price subtract the cost price of a product or service. On the other hand, profitability is the level of return that has been obtained from an invested capital, it represents the management of that capital, and ultimately it is profitability that tells us whether the business in which it has been invested is a good business or not.
Higher profit (profit) does not always mean higher profitability. A profit of $ 1,000 can be obtained with an investment of $ 500 or $ 250.
We see that the profit is the same, however the profitability is different and we see in this case how important it is to be clear and present the concept of profitability.
This means that the most important variable that must be taken into account when analyzing and evaluating a business project is not profit but profitability. A high profit but a low profitability implies in the first place a greater investment, at the same time that it requires greater effort and sacrifice to obtain the same or less than what would be obtained if it were invested in a more profitable business or sector.
The less investment you have to make to obtain a certain profit, the better the business project will be, this thanks to profitability, since it is this that determines how much will be the percentage of return that will be obtained in A or B investment, and thus we learn which is the difference between profitability and profit