Introducing: Profitability
April 16, 2009, 2:19 pm
Is the mother of all performance metrics & exists for all endeavors.
Every company, organization and endeavor has a an implicit profitability, whether or not it is clearly articulated and understood. It’s the benefit derived from action taken. At its simplest, it is revenue minus expense: incoming minus outgoing, output minus input, result attained minus effort expended. Profitability is what is left after all is said and done. The intent is to create a net-benefit at the end of all the work and use of resources. Most humans work to generate a benefit of some sort for themselves or for others.
Profitability carries a numeric sign, which means it can be positive, zero or negative. Unless we want to deceive ourselves or others, profitability is always comprehensively inclusive: it includes all revenues and all costs related to a defined entity. Reporting anything less is merely an altered subset created for some ulterior motive: as such, that subset cannot tell you true profitability.
The bottom line is that all efforts contain measurable profitability. The need is to know what those measurements are and to objectively track them.
Random Profitability Samples
To show examples of profitability, as reported through financial reporting from company websites, I picked four companies that: a) have 2-3 letter “names,” b) are well-known and c) are in different industries. On their websites, in the financial information sections, I selected, however defined, “Total Revenue” and “Net Income” (or nearest equivalent). The difference between these two numbers was labeled “Total Expense.”
|
|
IBM |
3M |
GM |
AIG |
|
Rev |
104 |
25 |
149 |
11 |
|
Exp |
91 |
22 |
180 |
110 |
|
Profit |
12 |
3 |
-31 |
-99 |
Revenue, Expense & Profit (billions). Sources: 2008 Financial reports
Profitability: the apex of an organization
Every human endeavor, regardless of how it is organized, has profitability. Endeavors which are not profitable are simply not meeting their mission. Human endeavors can be formed any number of ways: as a corporation, not-for-profit organization, religious group, even an ad-hoc group that agrees to do a particular task. The form of organization is not important: that decision is driven by pragmatic considerations and is wholly a “how” question. Whatever works best.
The goal or purpose of the endeavor, however, is the quintessential “what” question. It is the raison d-etre for the effort. The purpose and goal of the endeavor is the effort’s benefit and its profit. How well that goal is achieved is the effort’s profitability. As a driver, profitability is the pinnacle of all activities and all uses of resources. What is your profitability?
Next up: Components of profitability
Bill
William A. Stong
william.a.stong@gmail.com
SBF&P # 4
c. 2009 Integrated Profitability
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