What is Profitability
The purpose of setting up of a project is primarily to earn profit by generating surplus cash inflows over the total cash outflows from the stage of construction till completion and start of operation activities. The term profitability represents the surplus cash inflows over the cash outflows.
For estimating the profitability of the proposal, various items and indices are used, the first is capital employed. It includes fixed capital cost and working capital. Fixed capital cost is the total cost of the project. However, this will not include the cost of spares, training cost and margin money for working capital. The provision for these items is made only for the financing purpose as these are not capitalized. Working capital is the initial expenditure for procurement of raw materials, payment for labourers operating expenses and other overheads till the finished product is sold and cash is realized. The next item to be estimated is the benefits. Benefits may be in the form of following:-
Net profit in case of new project. Reduction in cost of production at the same level of production. Lower rejection/wastages. Quality improvements. Better working conditions. Fuel saving i.e. energy conservation. Better information system. Lower pollution or total pollution control.
In the process of estimation of profitability of the project the next step is to estimate the cost of profitability services of the products, the project would be generating elements of cost generally are:-
Raw materials. Labour. Power and fuel. Repairs and maintenance. Stores and spare parts. Operating cost. Overheads.
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.