Determinants of Profitability for a Company

Determinants of Profitability Factors

Performance evaluation is the cumulative consideration of factors that may be representative indicators or appraisal of an individual or entity’s activity, or performance in reference to some standards over a period of time. It considers the degree of goal attainment, how items are measured, and what standards are to be applied. This is very easy to evaluate the performance of a company by watching simply the profitability. But by which this profitability is determined is the main concern for a company. For making easy to understand about the determinants of profitability I am going to describe some factors by which profit is determined.

1. SALES: Sales are an important factor in determining profitability. The return on sales ratio measures profits after taxes based upon the current year's sales. If sales numbers are high, a company is better prepared to handle adverse market conditions and economic downtrends. The gross profit margin is a measure of gross profit earned on sales. An effective sales strategy is essential in increasing a company's profitability.
2. PRICING: Price setting is a key factor in determining profit. Careful analysis is necessary in determining the correct pricing strategy for a company. A business owner must look at what competitors are charging and determine what prices he should charge to maximize profits. An important factor to consider in pricing strategy is determining what price customers are willing to pay for a product. Customers will pay more for niche products or services that are not readily available elsewhere. A business owner does not want to leave money on the table by undercutting the price charged for products and services.
3. EXPENSES: For a company to become profitable, income must exceed expenses. Expenses can be defined as the cost of resources used in the activities of a business. Profits for the company are determined by analyzing what is left over after expenses are subtracted from total revenue. Any cost-saving measures initiated by a company will bring expenses down and increase overall profitability.
4. MONOPOLY: The degree of competition a firm faces is important. If a firm has monopoly power then it has little competition, therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. However govt. regulation may prevent monopolies abusing their power e.g. the OFT can stop firms colluding (to increase price) Regulators like OFGEM can limit the prices of Gas and Electricity firm.
5. FASHIONABEL: The degree of competition a firm faces is important. If a firm has monopoly power then it has little competition, therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. However govt. regulation may prevent monopolies abusing their power e.g. the OFT can stop firms colluding (to increase price) Regulators like OFGEM can limit the prices of Gas and Electricity firm
6. ECONOMIC CONDITION: The State of the economy. If there is economic growth then there will be increased demand for most products especially luxury products with a high YED. For example manufacturers of luxury sports cars will benefit from economic growth but will suffer in times of recession.
7. ADVERTISING CAMPAIGN: A successful advertising campaign can increase demand and make the product more inelastic, however the increased revenue will need to cover the costs of the advertising. Sometimes the best methods are word of mouth. For example it was not necessary for YouTube to do much advertising.
8. SUBSTITUTES: Substitutes, if there are many substitutes or substitutes are expensive then demand for the product will be higher. Similarly complementary goods will be important for the profits of a company.
9. EFFICIENCY: The more efficient a company the more it will be able to earn profit. It will be able to produce product quickly and cost effectively. An efficient company can compete perfectly with the competitors by which they can increase profitability.
10. SPREAD: Spread is the difference between receiving and giving the amount of interest. For the banks spread is the most important factor for determining the profit. The more spread says the more profit earned by the bank.

The objective of this paper is to examine the factors that determine the profitability of a firm. This objective has been achieved thus far. The above factors say the profitability of a firm undoubtedly. There may have many other factors by which profitability can be determined. But I have tried my best to show the most important factors for determining the profitability of a company. I think after understanding the factors and watching them of any company we easily will be able to say about the profitability of a company. I mean they are very much helpful for determining the profitability for a company.