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To what extent is profit a good indicator of the success of an organization?
Sometimes profit can be seen as a good indicator of the success of an organisation, but this is not always true. Everything depends on what an organisation thinks of success. The Oxford's Dictionary (000) defines "Success?as "the fact that you have achieved something that you want and have been trying to do or get? An organisation may have different aims than the profit maximisation; therefore I would like to explain the different kinds of organisations.
The diagram above is a very simple division of the types of organisations. Shafto (1) states that "an Organisation is a group of people held together by an agreed structure involving the acceptance of agreed rules and a system of authority, seeking to pursue a specific objective or a set of objectives? Organisations can be roughly divided into multinationals and non-profit organisations.
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Marcouse (1) defines "Multinationals?as "a firm which has its headquarters in one country and branches, manufacturing or assembly plants in others? "General Motors?generates more turnover than Denmark and "Ford Motor Company?generates more turnover than Poland, both of these companies are multinationals. It is obvious that these kinds of companies are aiming to maximise their profit, even though they may have other objectives such as growth and development, to be the most efficient, to maximise stockholder wealth, and so on.
The non-profit organisations, such as Greenpeace, Oxfam, National Health Service hospitals, and others, have other aims rather than the profit maximisation. The non-profit organisation does not think that profit maximisation a good indicator of success. Some of the aims of the non-profit organisations are ecological, charitable, to help the society, etc. This kind of organisations also needs profit to accomplish some of their aims, but all this profit is going to be reinvested in order to expand the organisation to help other societies.
Another point to include is the High Quality profit and Low Quality profit. Marcouse (1) states that "The High Quality profit is the training profit which can be expected to be sustained into future years, on the other hand, Low Quality profit is the profit arisen as a result of one-off source?
A lot of companies earn a low quality profit. A clear example of a low quality profit would be Firestone. Firestone is an American company that makes rubber tyres; their costumers had several accidents with the Radial ATX and Radial ATX II tyres, causing more than 10 deaths and more than 000 injuries in all over the world. Now the Ford Motor Company, Mercury and Mazda are recalling specific models of cars to change their tyres. The Bridgestone (a rubber tyre company from Japan) bought the Firestone and the company is now called Bridgestone/Firestone. The Firestone was sold to the Japanese company because of its bad economic conditions.
FORD MOTOR CO (NYSEF) - More Info News, Profile, Reports, Research, Insider, Options, Msgs - Trade Choose Brokerage
Range 1d | 5d | m | 6m | 1y | y | 5y | max Type Bar | Line | Cdl Scale Linear | Log Size M | L
Compare F vs. S&P Nasdaq Dow
(Yahoo)
From the graph above, we can appreciate how Ford Motor Company it is paying for the consequences of Firestone's bad tyres. The share stocks of Ford are going down because most of the accidents occurred with Ford cars.
Microsoft is a good example when we talk about high quality profit. Microsoft is a company that sells a computer language (software). This software is very popular now, but the development of the software started in 18 when they first launched Microsoft Windows. The great Microsoft success of the 10s was the launch of Windows 5. Nowadays a lot of similar programs exist in the market, but everyone is familiarised with Microsoft Windows. It would be very difficult for an entire company to learn to use another software rather than Windows; it would take time, money and effort on learning the working mechanism of the other software.
MICROSOFT CP (NasdaqNMMSFT) - More Info N/A - Trade Choose Brokerage
Range 1d | 5d | m | | 1y | y Type Bar | Line | Cdl Scale Linear | Log Size M | L
Compare MSFT vs. FTSE 100 FTSE 50 Dow Jones
Splits none
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The stocks of Microsoft are doing well, they falling down a little bit at the end but I personally believe that this falling is because the recession period of the economy.
Companies with aims of profit maximisation may have some problems if they are only focused on the short-run rather than the long-run profit maximisation. When the company is focused on the short-run profit maximisation, this company may cut quality of their selling product, by buying cheaper machinery, or reduce wages in order to reduce costs and have a better turnover at the end of the year. If a company takes one of these decisions they may have some trouble in the long-run, because costumer will be unsatisfied if the quality of the product is bad or the employees will be unhappy about their wages and they can go on strike or this may lead to absenteeism which means that the company would have to spend more money on substitute workers.
On the other hand if an organisation is starting to run a business they cannot plan a long-run plan of profit maximisation, otherwise they will go bankrupt. A new organisation needs a lot of profit to stabilise. I strongly believe that if an organisation is starting a business they should make between short-run and medium-run plans. When a new organisation is settled and stable, the aims of the organisation will be easier to achieve.
We cannot tell if a business is successful by only looking at its balance sheet, if we want to know if a business is successful or not, we have to compare the business with other businesses that are competing on the same area. If we take Sainsbury's as an example, we can easily see that this balance sheet is good, they earn a lot of profit, they gearing is low, etc. But I cannot tell if it is a successful company.
Statistics at a Glance -- SBRY.L (in British Pounds)
Income Statement
1(1) 000 001
Turnover Mill. ? 16,4.00 16,71.00 17,44.00
Pre tax profit Mill. ? 888.00 50.00 44.00
Creditors short Mill. ? 4,54.00 4,70.00 4,5.00
Creditors long Mill. ? 81.00 1,041.00 1,078.00
(Yahoo)
To determine if the company is successful, I would like to compare this balance sheet with Tesco's balance sheet.
Statistics at a Glance -- TSCO.L (in British Pounds)
Income Statement
1 000 001
Turnover Mill. ? 17,158.00 18,76.00 0,88.00
Pre tax profit Mill. ? 84.00 .00 1,054.00
Creditors short Mill. ? ,075.00 ,487.00 4,8.00
Creditors long Mill. ? 1,47.00 1,584.00 1,51.00
(Yahoo)
Tesco seems to have a better turnover in the years show and it also seems to have a better gearing than Sainsbury's. So now we can make the conclusion that Tesco is more successful than Sainsbury's.
The economy itself also modifies the profit factor, because if the economy is in recession it is more likely that the profit of various organisations go down, whereas a boom in the economy will increase profit in various companies. That is why a loss in the recession period does not seem so bad
In conclusion, profit can be a good indicator of the success of an organisation; however we cannot ignore the various points such as the aims of the organization, the short-run and long-run profit maximization plans and its consequences, the economy period, and so on. We must take these various points and analyse them in order to get the best possible answer. Profit does not always indicate a good sign of success; we have to check the circumstances to see whether profit indicates the achievement of success for a business or whether is not relevant to the goals of the organization. It also depends on the quality of profit, if a company has a poor quality profit, this company is likely to receive a good turnover now but not a good turnover in the future.
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