business

What does profitability ratio mean

Your browser will redirect to your requested content shortly. TRUE PRODUCTIVITY: THE KEY TO PROFITABILITY by Rene T. Customers strike back by buying less or from somewhere else, and what does profitability ratio mean by working less or starting unrest.

As a result, costs further increase, profits further decline. The problem is compounded and the vicious cycle begins. It is the fundamental job of managers to absorb costs by increasing productivity, not by sacrificing the company’s most important stakeholders: customers and employees. It is a measurement of how efficiently you convert inputs or resources into useful outputs, products, or results.

Mathematically, you can increase the ratio by raising output, decreasing input, or both. Before we examine the difference, let us see what we really mean by “output”, the more important variable in our productivity ratio. As the term deceivingly connotes, it is something that is “put” “out” by any process – man or machine. It could be cars assembled, documents filed, hamburgers cooked, holes drilled, words typed per minute, etc. The problem starts when the concept is transplanted into the business setting, more precisely, the market place – where not all outputs are useful or have value. In business, an output has value if it is a saleable or usable product, finished or in-process. All products are outputs, but not all outputs are products.

Something does not become useful just because it comes out of a process. The danger with the conventional approach of maximizing output to raise productivity is that it tends to disregard the right quality and quantity which the user – the next process – will accept. The tendency is to overproduce, overstock and sacrifice quality for the sake of quantity. While conventional productivity is production-oriented, the world class approach is market-oriented. It starts with the requirements of the customer – output quantity and quality- and then works back to improve all processes and minimize all inputs.

Since the productivity program started with the user or customer in mind, all outputs are guaranteed to be usable. Nothing is wasted in output or input. It may appear that in a buyer’s market, world class productivity, like JIT, would be more effective than the traditional approach. Question: In a seller’s market, wouldn’t conventional productivity be better than world class productivity?