Go Back   ManagementParadise.com | Management & Business Education Learning Platform Banking and Insurance Paradise ( BBI Projects and Research Notes ) > Discuss about leading banks and insurance companies

Quantum of profitability

Discuss Quantum of profitability within the Discuss about leading banks and insurance companies forums, part of the Banking and Insurance Paradise ( BBI Projects and Research Notes ) category; ...

Reply

 

Thread Tools Display Modes
Quantum of profitability
Old
 (1 (permalink))
priyanka1987
priyanka1987 is a name known to allpriyanka1987 is a name known to allpriyanka1987 is a name known to allpriyanka1987 is a name known to allpriyanka1987 is a name known to allpriyanka1987 is a name known to all
 
priyanka1987
Management Paradise Newbie
Status: Offline
Posts: 287
Join Date: Mar 2007
Exclamation Quantum of profitability - October 4th, 2007

Hey guy's this is a gud article on finance... worth reading!!!


Quantum of profitability



Profit serves three purposes. It measures the net effectiveness and soundness of a business’s efforts. It is indeed the ultimate test of business performance.

It is the “risk premium” that covers the costs of staying in business – replacement, obsolescence, market risk and uncertainty. Seen from this point of view, there is no such thing as “profit”; there are only “costs of being in business” and “costs of staying in business.” And the task of a business is to provide adequately for these “costs of staying in business” by earning an adequate profit – which not enough businesses do.

Finally, profit insures the supply of future capital for innovation and expansion either directly, by providing the means of self-financing out of retained earnings, or indirectly, through providing sufficient for new outside capital in the form in which it is best suited to the enterprise’s objectives.

None of these three functions of profit has anything to do with the economist’s maximization of profit. All the three are indeed “minimum” concepts – the minimum of profit needed for the survival and prosperity of the enterprise. A profitability objective therefore measures not the maximum profit the business can produce, but the minimum it must produce.

The simplest way to find this minimum is by focusing on the last of the three functions of profit: means to obtain new capital. The rate of profit required is easily ascertainable; it is the capital market rate for the desired type of financing. In the case of self-financing, there must be enough profit both to yield the capital market rate of return on money already in the business, and to produce the additional capital needed.

It is from this basis that most profitability objectives in use in business today are derived. A business venture expects for a return on capital of at least 25% before taxes, is accountant’s shorthand way of saying: A return of 25% before taxes is the minimum we need to get the kind of capital we want, in the amounts we need and at the cost we are willing to pay.

This is a rational objective. Its adoption by more and more businesses is a tremendous step forward. It can be made even more serviceable by a few simple but important refinements. First, as Joel Dean has pointed out, profitably must always include the time factor. Profitability as such is meaningless and misleading unless we know for how any years the profit can be expected. We should therefore always state anticipated total profits over the life of the investment discounted for present cash value, rather as an annual rate of return. This is the method the capital market uses when calculating the rate of return of a bond or similar security; and, after all, this entire approach to profit is based on capital market considerations. This method also surmounts the greatest weakness of conventional accounting: its superstitious belief that the calendar year has any economic meaning o reality. We can never rationalize business management until we have freed ourselves from one company president (himself an ex-accountant) calls, “the unnecessary tyranny of the accounting year”.

Second we should always consider the rate of return as an average resulting from good and bad years together. The business may indeed need a profit of 25% before taxes. But if the 25% are being earned in a good year they are unlikely to be earned over the life time of the investment. A business may need a 40% return in good years to average 25% over a dozen years. And the people at the helm of the business must have to know how much they actually need to get the desired average




Take care

Njoy!!

Warm Regards,
Priyanka
Advertisements



Warm Regards,
Priyanka
(FOUNDER OF BBI FORUM)



Life is not the amount of breaths u take but the moments that take ur breath away..
To view links or images in signatures your post count must be 0 or greater. You currently have 0 posts.
Press Thanx Button If You Find POst Usefull...May God Bless Ya All
To view links or images in signatures your post count must be 0 or greater. You currently have 0 posts.
Friends: (0)
Reply With Quote
Re: Quantum of profitability
Old
 (2 (permalink))
Rose Marry
rosemarry2 is an unknown quantity at this point
 
rosemarry2
Management Paradise Guru
Status: Offline
Posts: 2,125
Join Date: Apr 2016
Re: Quantum of profitability - April 12th, 2016

Quote:
Originally Posted by priyanka1987 View Post
Hey guy's this is a gud article on finance... worth reading!!!


Quantum of profitability



Profit serves three purposes. It measures the net effectiveness and soundness of a business’s efforts. It is indeed the ultimate test of business performance.

It is the “risk premium” that covers the costs of staying in business – replacement, obsolescence, market risk and uncertainty. Seen from this point of view, there is no such thing as “profit”; there are only “costs of being in business” and “costs of staying in business.” And the task of a business is to provide adequately for these “costs of staying in business” by earning an adequate profit – which not enough businesses do.

Finally, profit insures the supply of future capital for innovation and expansion either directly, by providing the means of self-financing out of retained earnings, or indirectly, through providing sufficient for new outside capital in the form in which it is best suited to the enterprise’s objectives.

None of these three functions of profit has anything to do with the economist’s maximization of profit. All the three are indeed “minimum” concepts – the minimum of profit needed for the survival and prosperity of the enterprise. A profitability objective therefore measures not the maximum profit the business can produce, but the minimum it must produce.

The simplest way to find this minimum is by focusing on the last of the three functions of profit: means to obtain new capital. The rate of profit required is easily ascertainable; it is the capital market rate for the desired type of financing. In the case of self-financing, there must be enough profit both to yield the capital market rate of return on money already in the business, and to produce the additional capital needed.

It is from this basis that most profitability objectives in use in business today are derived. A business venture expects for a return on capital of at least 25% before taxes, is accountant’s shorthand way of saying: A return of 25% before taxes is the minimum we need to get the kind of capital we want, in the amounts we need and at the cost we are willing to pay.

This is a rational objective. Its adoption by more and more businesses is a tremendous step forward. It can be made even more serviceable by a few simple but important refinements. First, as Joel Dean has pointed out, profitably must always include the time factor. Profitability as such is meaningless and misleading unless we know for how any years the profit can be expected. We should therefore always state anticipated total profits over the life of the investment discounted for present cash value, rather as an annual rate of return. This is the method the capital market uses when calculating the rate of return of a bond or similar security; and, after all, this entire approach to profit is based on capital market considerations. This method also surmounts the greatest weakness of conventional accounting: its superstitious belief that the calendar year has any economic meaning o reality. We can never rationalize business management until we have freed ourselves from one company president (himself an ex-accountant) calls, “the unnecessary tyranny of the accounting year”.

Second we should always consider the rate of return as an average resulting from good and bad years together. The business may indeed need a profit of 25% before taxes. But if the 25% are being earned in a good year they are unlikely to be earned over the life time of the investment. A business may need a 40% return in good years to average 25% over a dozen years. And the people at the helm of the business must have to know how much they actually need to get the desired average




Take care

Njoy!!

Warm Regards,
Priyanka
hey friend,

Here I am sharing Impact of Profitability on Quantum of Non-Performing Loans, please check attachment below.
Friends: (0)
Reply With Quote
Reply

Bookmarks

Tags
profitability, quantum


Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is On
Trackbacks are On
Pingbacks are On
Refbacks are Off


ManagementParadise.com is not responsible for the views and opinion of the posters. The posters and only posters shall be liable for any copyright infringement.



Search Engine Optimization by vBSEO ©2011, Crawlability, Inc.