Profit is the idea of boosting your life’s or business’ comfortability, amid growing and becoming successful.
All businesses or individuals fail to interpret their profitability right, and therefore, make many mistakes in achieving this outcome.
What timeframe should, therefore, an organization aim for when it comes to profitability, short-term or long-term?
Short-term gains cannot be a driver of long-term profitability, as short-term results do not guarantee, whatsoever, future success.
Long-term profit confirms the well-being of a business
The long-term profitability is an indication that an entity was able to generate revenue, and has implemented cost management techniques to keep cost and expenses low for higher profit margin.
Long-term profitability is a confirmation that the business is doing well on a year-on-year, quarterly, and bi-annual basis, whereas short-term profitability could take place on a monthly basis, and cannot represent the big yearly financial status of a firm.
Should someone wish to calculate profitability, the formula is:
Revenue (Sales) minus Cost of Revenue (Sales) – Expenses – Taxes on Profit = Net Profit
In the scenario that a business is a producer, it incurs the so-called ”Cost of sales”. The Cost of Sales are the raw materials used to produce the end-product.
On the other hand, if a business is a service provider, it mostly has expenses, unless the owner or the accounting department aims to break down the figures as Cost of Sales.
Furthermore, a business or an individual, once arriving at the final figures, it, or she or he, can then come up with some ratios for comparison purposes.
Some of these ratios are the a) Gross Profit Margin, b) Profit Margin, c) Return on Assets, d) Return on Capital Employed and e) Return on equity.
The above ratios assist the accounting department and the financial controller of a company to manage the accounts appropriately.