Profitability

The ability to make profit from all the business activities of an organization, company,

firm, or an enterprise is referring to as profitability. It shows how efficient can the management

do to make profit by utilizing all the resources available in the market.

According to Harward & Upton, “the ability of a given investment to earn a return from

its use is talking about profitability.” Generally, it is an indicator of efficiency; and is regarded as

a measure of efficiency and management guide to greater productivity.

According to Dr. Monica Tulsian (2014), profitability is a relative concept whereas profit

is an absolute connotation. Aside from being closely related to and mutually interdependent,

profit and profitability are two different concepts. In other words, in spite of their generic nature,

each one of them has a different role in business. The word 'profitability' is a term which

composed of two words, namely; profit and ability. The term profit is the excess amount of

income over expenses. The term ability indicates the capability of a firm to earn profits.

Sunday Kehinde James (2011) conducts a study regarding effective management of

working capital within small and medium-sized entities (SMEs). Most of the SMEs have weak

working capital model and they don’t even have standard credit policy. They have an

unfavorable financial position, and rely on credit standing to finance their operations. In

conclusion the authors recommend that for SMEs to survive they must design a standard credit

policy, ensure good financial report and control system so as to improve the working capital

management as well as the profitability. They must give adequate awareness to the management

of working capital. All this requires systematic planning for the management of working capital

to ensure continuity, growth and ability to pay the current maturing debts.
 Cheng, MuiGek (2013) studied that working capital management has an effect on

profitability of the company and determine the firm value; it is among the most important criteria

for any shareholders or potential shareholders to decide whether to invest or not to invest.

Inefficiency in managing the working capital will result in insolvency or eventually lead to

bankruptcy. Meaning to say, managers should weigh all the elements that will affect the working

capital management. The results show that there is a significant relationship between working

capital management and profitability; therefore, efficient working capital policy can improve

profitability of the company and also the wealth of the potential investors.

The research of Rahman Mohammad M. (2011) is based on relationship between

working capital and profitability; to analyze the effectiveness of working capital management of

the selected manufacturing and merchandising companies. Conclusion of the study found that

overall good management in working capital of selected SMEs are profitable way going on.