Link Between Productivity and Profitatbility

Chapter 1: INTRODUCTION

This chapter provides the foundation for the study of productivity and profitability by analyzing what these two parameters are all about. It elaborates the important relationship between productivity and profitability that how they relate with each other.

The aim of a nation is to improve the living standards of the citizens, increase employment and generate more pool of jobs. Profit is said to be the main reason of existence of any organization.

1.1: Profit

Profit is basically the amount a business makes after accounting for all the expenses, regardless of the nature of business. Profit can also be defined as a difference between the purchase price and the cost incurred to produce a product. Profit comes from combinations of different factors taken by the management like good governance, sales, innovation and investments. It is the key objective for all the organizations to earn and sustain profit. People wishes to invest in those organizations which are more profitable. [1]

1.2: Productivity

Productivity is defined as the ratio of what is produced to what is required to be produced. Productivity helps to define both the scope for raising living standards and the competitiveness of an economy. Productivity has thus, an increasing position in formulating financial performance. (Elliot, 2007) [2]

Productivity is said to be the relationship between total outputs with total inputs. Output such as goods and services produced and Inputs include capital, material, labor and other resources. [2]

Productivity ratios vary in measurement units. They can be measured in percentages, dollars per hour, pieces per day, hours per day etc. If productivity ratio is measured in revenue per cost, then it directly relates to profitability. Productivity can only be measured for tangible inputs and outputs.

1.2.1: Role of productivity

Productivity plays a vital role to the economy of any country because it allows achieving more with investing less....