Concepts Of Profit And Profitability

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In my current job in the petroleum industry where we sell and buy fuel and lubricants, the concept of account payable is applicable in the following ways.
• We do get goods sometimes on credit from our suppliers of fuel and pay at a later time if we do not have all the cash required to procure the number of litres we require
• Within a period agreed with our supplier, usually 7 calendar days, we make payment in full for the balance of the cash outstanding
• If by any chance we did not make payment as agreed for many reasons, we notify our suppliers on the exact date for payment which has to be fulfilled
• If we do not by any chance again failed to make payment as promised, we get reminders by telephone from our suppliers on the need to make
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It can be gross profit or net profit which should be interpreted well in conjunction with other financial rations if the shareholders want to know the performance of the entity over time.
Profitability is therefore, a relative concept used in business generally while profit is said to be an absolute connotation. Although the two concepts are very closely related and the two are mutually interdependent, the concepts of profit and profitability are actually two but very different concepts.
Significance of the concept
Profitability has a concept is significant in a number of ways below.
• Profitability is critical for the survival of the firm in the long run and without it, growth of the firm is not possible
• The net profit is the revenue after deducting all production or selling expenses of the firm and shows the growth in shareholders’ value each period.
• Excess profits available after paying the shareholders is reinvested in the firm so as to increase the net worth of the business and also balance sheet.
• Profit is the primary goal of any profit making
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• Profitability is vital not only for the value of the business, but also to its management and shareholder.

Implementation activities related to the concept
The implementation of the activities of the concept of profitability varies from firm to firm. According to Erik M. van Raaij, Maarten J.A. Vernooij, Sander van Triest (2003), the implementation of profitability follows the concept of Activity Based Costing. However, the generally common implementation mechanism is centred around the following activities.
• The time line for assessing the profitability of the business firm is very important. Is it a day, week, month, biannual or annual so that relevant calculations are tied to the right period under review.
• The revenues generated during the period in question are then aggregated together so that the total gross turnover is obtained.
• The next activity is to determine the relevant direct costs or expenses incurred in the process of generating the revenues associated with the

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