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Profitability refers to the potential of a venture to be financially successful. This may be assessed before entering into a business or it may be used to analyze a venture that is currently operating. Although it may be found that one set of factors is not likely to be successful or has not been successful, it may not be necessary to abandon the venture. It may instead be feasible to change operational factors such as pricing or costs.
There are three basic situations that can describe a business’ financial situation. It can be profitable, it can break even, or it can operate at a loss. In most cases, an organization’s goal is to make a profit.
When there is constant or abundant cash flow, it can be difficult to determine profitability. It is easy for a person to make the mistake of linking numerous incoming and outgoing transactions with profit. Spending and receiving money, however, does not mean a business is in a healthy financial state.
To determine profitability, it is necessary to access the price of the goods or services being offered. There are several things that need to be considered when prices are established. This includes variable costs such as fuel, labor, and inventory, and it also includes fixed costs such as mortgage, repairs, and taxes.
Yield must also be considered. This refers to the amount of products or services produced within a certain time frame or from a certain amount of materials. For example, if a full tank of gas is only sufficient for two deliveries, the price is likely to be higher than it would be if a full tank of gas could accommodate six deliveries. If the price for two deliveries were priced the same as six deliveries, it is likely that profitability would be jeopardized.
Tracking profitability may require two things. First, a business will likely need good and accurate records of its expenses. Second, depending on the size and complexity of the venture, a person with good accounting skills may be needed to ensure proper calculations.
There may be a number of parties interested in the profitability of a particular venture. For example, sometimes people are owners of businesses but they are not operators, giving them a reason to be interested in the financial health and direction of the venture. Stakeholders who have money invested are also likely to be highly concerned with the profitability of a business. Employees, especially those at the managerial level, should also care because lack of profit can threaten job security and may damage a person’s professional reputation.