Profit and profitability are two key performance indicators that you need to master to understand your company’s financial health. Many entrepreneurs think that both are synonymous, but there are essential differences that change the perspective of finances.
When the two concepts are mixed, understanding your company’s results is masked (for better or worse, depending on the case) and management becomes less efficient. In order not to take this risk, it is better to understand once and for all the difference between profit and profitability.
Profit and profitability are two concepts related to the business’s net profit, but with different points of view and functions. To understand the difference between them, let’s start by defining each one.
Profit is an indicator that reveals how much a business earned in relation to everything it received, that is, its net profit margin. Technically, it is the relationship between net profit value and the value of services in percentage, that is, the company’s earnings compared to its sales.
It is easy to understand these concepts: when a company sells a product or a service, the price charged does not reflect the cost of labor, structure, aircraft purchase, taxes, etc. Therefore, net profit is the amount that is left for the partners after deducting all expenses, taxes, and other company costs.
On the other hand, profitability is a percentage measurement that reveals operational efficiency, whether it can cover costs and still generate a good percentage of profit from sales or services provided.
Profitability is an indicator linked to initial investment and how much return it can provide for the business. In this case, we can measure how much the company earned from the initial investment made to open or any other investment type.
For this, profitability is calculated based on the relationship between net income and the company’s investments. In this case, the calculation can be applied to the total net profit and the sum of assets during a period or specific investments to measure how profitable the business is for the partners.
In addition, profitability can assess whether an investment is worthwhile for the organization. Finally, profitability can also be calculated based on the company’s cash flow at the end of the year, compared to investments made in the same period.
You may have noticed some critical differences between profit and profitability in the definitions. First, profit compares the company’s final profit with billing for services, while profitability compares the absolute gain with the investments. Both are based on a net profit comparison, but point to different financial performance analyses.
Also, profitability depends on costs, pricing, and the relationship with the competition, determining whether the sales revenue will cover all costs and still generate a profit on the final balance. Profit, on the other hand, depends on the company’s ability to generate returns from invested resources.
Although the two indicators are closely related, it is possible to have good profitability and low profit and vice versa. Understanding the difference between profit and profitability is essential to know precisely your company’s earnings.
That’s because evaluating just profit or just profitability can give you the false impression that your business is successful when the reality may be different when comparing both. Measuring correctly, supported by agricultural aviation management systems, is also essential.
Confusing these concepts can make your company appear to have problems that it does not have, or present unrealistic results. It is of no use to a business to show a large profit if the investments were substantial, just as it is not ideal to have significant profitability if the revenue was not so great. The correct assessment of these two variables provides more accurate information about the company, allowing better decision making.
It is possible to perform predictive analysis to avoid losses in the future. If you plan to raise funds to invest in the company’s growth, it is vital to have attractive profit and profitability.
It is not because profit and profitability are different that they do not have an essential relationship for those who evaluate a business’s health. For example, a company that has profit, but is unprofitable, may not maintain itself because even if the return is positive in relation to the investment, the costs can still be very high.
There are also cases in which the company may be seasonal, requiring a large initial investment. In these cases, profitability needs to reach a desirable level to recover the investment. In addition, it may be that the company is not profitable initially. Still, profitability pays off over time and promotes the recovery of investment; in that case, only the return period on investment will be more significant.
Similarly, a company may have lower profitability, but have an excellent profit, favoring specific investments to optimize the gross revenue costs.
Ideally, there should be a balance between the two indicators, signaling that the company can cover its costs, generate profit and still give a good return on the initial capital invested.
Rafael Corrêa da Costa, Cuiabá Brazil
Bachelor of Aeronautical Science, Post-graduate degree in operational safety, 13 years experience as an executive and agricultural pilot. Ten years as an operational security manager for ANAC (Brazilian FAA).
Rafael has served as flight coordinator and air operations manager, in addition to acting as a pilot, and managing six agricultural aviation companies with aeronautical advice. He is currently CEO of Agrofly Sistemas.