Profits Versus Profitability

Business Coaching and Small Business Economics

By: Santi Chacon
Business Coach

What is the difference between profits and profitability?

When a company earns profits it is said to earn more sales revenue over the cost of operations.  This just means that it earns more than it spends.  Profitability, however measures how well a company invests back into itself with the intention of seeing long-term profits.

What areas do you need to invest in to be profitable?

This question demands that you to see beyond your business today and to begin to think strategically. 

Thinking Strategically

• One area a executives could invest in that will ensure profitability is in their employees.  In this example a company can provide continual education, free health benefits, or free breakfast, lunch, and dinner for those staying late.  This type of investment will ensure that employees will stick around and work hard.  

• Another area of investment might be in marketing.  Executives may see potential in the use of social media for company branding. 

• A third investment could be found in creating a different product line or subsidiary that can assist the company in its goal to diversify, so it can be financially stable during tough economic conditions. 

• And yet another one could be an investment in your own database or existing customer base; research into the needs and desires of your customers could make all the difference in being profitable for years to come.

Let me ask the question again, just in case you missed it: What areas do you need to invest in to be more profitable?

A Little That Says A Lot

There are a million and one areas you can invest in, just think strategically.  Both profits and profitability are quite important in measuring the ongoing health of a company. Although a company needs to sustain itself long-term by making good decisions it also needs to sustain itself today.

Good questions we as future business professionals need to ask is how do we balance profitability and profits? and what specifically do we need to focus on for long-term sustainability? 

The Power of Information:

Think about an organization and how it operates and learn to gravitate toward the information that is going to give you a perspective on how a company is using it's resources and how it is earning an immediate profit. Locate the key indicators in your business that will provide vital data such as your cash-flow statement or sales, or reports that cover customer retention, or customer attrition. 

Re-framing:

A profitable company needs to focus on its' investments, which means that executives should be asking, with every purchasing decision, what is the long-term consequence of my purchase/investment? Executives should also learn to identify investments geared toward developing a long-term competitive advantage.

What Business Investments Are You Making?