Question

Discuss the importance of operational profitability and net perido profitability for the company owners and financial institutions by giving an example.

Answer 1

The Operating Profit residual income of the company after paying off operating expense paid by the company in running the business.

Operating Profit = Gross Profit – Operating Expenses

The Net profit is the remaining income of the company reducing all expenses that are done by the company also reducing interest paid to lenders and taxes and penalties to the government.

The importance of operational profitability and net period profitability for a company owner is as below:

· Operating profit helps to know the company owner that how the company is managing its resources and its expense management. The net profit helps to know the company owner that, In an accounting period actual profit earned by the company after reducing all expenses

· With the help of Operating profit company owner can eliminate unnecessary operating expenses whereas with the help of Net profit company owner can assess the profit and performance of the company in an accounting period.

· Operating profit help to understand that this segment of the business is more profitable and which are loss-making however net profit tell about the position of the whole company as a segment segment

·, For example, a G.P ratio of 20% and a net loss of 2% tell that company to the company owner that the company is doing good in operation but due to other overheads company is suffering losses, therefore, the owner should reduce the non-operational expenses.

The importance of operational profitability and net period profitability for the financial institution is as below:

· Positive Operational profit shows to financial institutes that fundamentally the company has the capacity to earn profit and repay loans. Whereas net profit that whether the company has already taken leverage to form other companies which makes it risky for the financial institute.

· Operation and net profit help to calcite the credit risk of the company while sensing the loan

· Operation and net profit help the financial institution to calcite the credit rating of a company which reduces the company's financial risk of the company.

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