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What is Profitability Control?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 09 July 2014
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    Conjecture Corporation
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One of the main reasons that companies come into existence is to make money. As the old saying goes, if the outgo exceeds the income, then one’s upkeep becomes one’s downfall. In short, if it costs more to operate than the amount of revenue generated to cover expenses and make a little extra, the company will soon fold. When it comes to making sure the corporation stays healthy, someone needs to be engaged in the task of profitability control. Here are some things that every businessperson should understand about the process of profitability control and its role in maintaining a healthy company.

In its broadest sense, profitability control is the process of evaluating the revenue producing ability of goods and services offered, as well as assessing the support services required to market and produce the good or service. The idea is to make sure that any product or service that is offered is generating enough income to not only cover the total cost of making the good or service available, but also to make a net profit for the company.

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As an example, a long distance provider will need to ensure that their service offering is priced in such a way that it strikes a balance between being competitive and covering all costs associated with service delivery. This will include generating enough gross profit to allow the company to employ persons who can properly service customer accounts, such as customer support personnel, accounting personnel, and technical support personnel.

From a marketing standpoint, there is also the need to develop marketing collateral that can be used in public relations campaigns, and by the sales force. One segment of profit control is the need to maintain marketing control; that is, making sure the cost of publicizing the service can be recouped within a reasonable amount of time from the gross profits generated by the sales effort. Without enough gross profits to make the effort worthwhile, the company will soon fold.

Along with being able to cover all operating, marketing, and sales costs, the company will also want to make a net profit from the service offered. Lack of profitability, demonstrated by the realization of a net profit, will eventually mean that the company will have no real reason to exist, and it will cease. The only way to avoid this situation is to engage in profitability control, and make sure the all company resources are being utilized at maximum efficiency.

For instance, a company that is managing to cover all expenses, but has little left to show for their efforts will want to evaluate every aspect of the operation, from personnel to procedures. If there are positions that can be eliminated or combined without compromising efficiency, then profitability control demands that those actions take place. Should it be determined that the operation is top heavy with managers or executives, then making some changes at those levels would be in line with solid profitability control procedures. In the event that some aspects of the operation are outsourced and it is determined they can be performed just as well in house and at a lower cost, then making those changes falls under the category of competent profitability control.

In the final analysis, profitability control is about doing what is in the best interests of the ongoing life of the company, whether it be eliminating or combining functions, pulling responsibilities in house or outsourcing them at a lower cost. While specifics will vary from one company to the next, as long as the concept of keeping the quality while getting rid of nonessentials will result in more net profit, which will make everyone involved very happy.

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