Profit vs.

Profitability
Profit:

1) For any business the main goal of its activity is to get Profit. Profit is one of
financials performances of a company and an evidence of its success, which
is achieved if the income exceeds the expenses.

2) Depending on profit, they determine the income share between the founders
and owners, the size of dividends and other income.

3) Profit refers to the net earnings. In other words it is simply Revenue minus
Expenditure. It reflects the actual earnings of the business including any
non-operating income or loss. It could be profit after or profit before tax.

4) Profit is also used to calculate the return on equity and debt funds, fixed
assets, the total advanced capital, and each stock.

Profitability:

1) To assess the effectiveness and feasibility of the enterprise, it is not enough

to determine only absolute indicators. A more objective picture can be
obtained using profitability indicators. Profitability indicators are relative
characteristics of financial results and performance of the enterprise.

2) The term “profitability” has its origin from the rent, which literally means
income. Thus, the term “profitability” in broad sense refers to yield,
revenue performance and efficiency.

3) Profitability reflects the final result of business operation. It refers to the

operating net profit i.e. profit before considering non-operating income or
expenses.

4) It helps to establish future earning capability of the business.

Thus, loss due to fire would reduce the profit of a business but not the
profitability of a business, since it is not an operating loss. Similarly any abnormal
gain would increase the profit of a business but the profitability would remain the
same.
Q.) “Financial Management is more than Procurement of Funds”. What do
you think are the responsibilities of a finance manager?

Financial management can be simply termed as efficient management of

finances of a business/organization in order to achieve financial objectives. The
key objectives of a financial management are to generate wealth for the business
and its shareholders, to provide a return of investment and to generate cash flow.
There are two main aspects of financial management, namely, the procurement of
funds and the effective use of those funds.

On the procurement of funds, one may note here that funds may be procured
from different sources and funds procured from different sources have different
characteristics in terms of cost, risk and control in financial-management-speak.
Funds issued through equity participation, that is, the financier acquires some
stake in the company, are least risky as the money used to buy equity can only be
repaid upon the liquidation of the company. But in terms of cost, these funds are
pricey compared to others mainly because the dividend expectations are normally
higher than the prevailing interest rates.

In principle, financial management comprises of risk, cost and control. For a

proper balancing of risk and control, the cost of funds should be at the minimum.

Financial management ultimately will involve making of some financial

decisions, and there are three types of such financial management decisions; long
term investment decisions, long-term financing decisions and working capital
management decisions. The third type of financial management decision, unlike
the first two, is short term in nature. The decision in this segment, involve
managing cash, inventories and short term financing. All financial management
decisions should form part of overall strategy and not be seen as separate. The
investment decision of financial management involves the managers deciding on
the kind and nature of assets that they want to hold. So, inevitably this will involve
selling, buying, reducing or holding of various assets. Managing those
aforementioned activities is called capital budgeting. The process of decision
making on investments will involve one of the cardinal principles of financial
management, which is that a firm should hold only those assets which yield a
return not less than a prescribed minimum.

Long term financing decision, as the name suggests involve deciding the mode
of procurement of funds to finance the necessary long term investments. The
corporate “graveyard” is littered with companies that went burst not because their
products had no market or that the workers were lazy, but because the decision
makers did not adhere to the principles of good financial management. If, carried
out competently, financial management increases the output from the factors of
production, especially, capital. Good financial management is especially essential
for start-ups which need it for their survival. It is also important to an organization
even if the profits are not in any way the motivation. Most of non-profit
organizations have scant respect for good financial management, but even such
bodies, and indeed everyone should be encouraged, if only for a wider utilitarian
objective.

Responsibilities of a Finance Manager

1) Estimation of capital requirements: A finance manager has to make

estimation with regards to capital requirements of the company. This will
depend upon expected costs and profits and future programmes and policies of
a concern. Estimations have to be made in an adequate manner which increases
earning capacity of enterprise.

2) Determination of capital composition: Once the estimation have been made,

the capital structure have to be decided. This involves short- term and long-
term debt equity analysis. This will depend upon the proportion of equity
capital a company is possessing and additional funds which have to be raised
from outside parties.

3) Choice of sources of funds: For additional funds to be procured, a company

has many choices like-
a) Issue of shares and debentures
b) Loans to be taken from banks and financial institutions
c) Public deposits to be drawn like in form of bonds.
d) Choice of factor will depend on relative merits and demerits of each
source and period of financing.

4) Investment of funds: The finance manager has to decide to

allocate funds into profitable ventures so that there is safety on investment and
regular returns is possible.

5) Disposal of surplus: The net profits decisions have to be

made by the finance manager. This can be done in two ways:
a) Dividend declaration - It includes identifying the rate of dividends
and other benefits like bonus.
b) Retained profits - The volume has to be decided which will depend
upon expansional, innovational, diversification plans of the company.
6) Management of cash: Finance manager has to make decisions
with regards to cash management. Cash is required for many purposes like
payment of wages and salaries, payment of electricity and water bills, payment
to creditors, meeting current liabilities, maintenance of enough stock, purchase
of raw materials, etc.

7) Financial controls: The finance manager has not only to plan,

procure and utilize the funds but he also has to exercise control over finances.
This can be done through many techniques like ratio analysis, financial
forecasting, cost and profit control, etc.