PROFIT AND PROFITABILITY

PROFIT AND PROFITABILITY

Sometimes, the term ‘profit’ and ‘profitability’ are used interchangeably. But in real sense, there is a difference between the two. Profit is an absolute term, whereas, profitability is a relative concept. However, they are closely related and mutually interdependent having different roles in business.

Pandey (2010), defines profits as the difference between revenue and expenses over a period of time( usually one year) while profitability refers to the operating efficiency of the enterprise. It is the ability of an enterprise to make profit on sales. It is the ability of an enterprise to get sufficient return on the capital and the employees used in the business operation.

Profit is the test of efficiency and a measure of control to the owners, a measure of worth of investments to the creditors, the margin of safety to the government, a measure of taxable capacity and a basis of legislative action to the country. Profits is an index of economic progress. National income generated and the rise in the standard of living while profitability is an outcome of profits. In other words, no profit drives towards profitability.
Firms having same amount of profits may vary in terms of profitability. That is, profits in two separate business concern may be identical, yet, many a times, it usually happens that there profitability varies when measured in terms of size of investments.