What is the Importance of Profit Management?

Importance of Profit Management

Friends, we are all aware that the main objective of any business is to make a profit.

But I firmly believe that the goal of any business should always be to make a profit as well as to manage that profit, and it is maybe for this reason that the subject of profit management is of the utmost important to me.

If we talk regarding profit management in greater depth then we all think that big companies that are listed on the stock market and progress their business with people’s money must have to manage their profits.

This should be handled by the Finance Manager. In general, a finance manager, along with the company’s director, decides how much of the profit amount should be distributed as dividend to the shareholders, and so the function of the finance manager becomes crucial.

Perhaps for this reason, the role of a financial manager is very important in every company, and a financial manager is responsible for managing the company’s dividend policy and earnings in such a way that it benefits to the share holders and it have also to maintain the wealth the company in a longer period of time. 

Importance of Profit Management

When it comes to profit management in a large corporation, there are only two things that come to mind. First and foremost, in any scenario, to divide some profit among its shareholders in the proper manner, and secondly to retain the profit in the business to use that in a future. 

Another essential characteristics of profit management is that there are no strict rules and regulations have yet been established by any central corporate authority to govern the profit earned by the particular company.

Even today, there is no clarity on how much portion of a company’s profit  must keep for future expansion and how much portion of the profit is to be distributed among its shareholders.

This is also one of the key reasons why, in the corporate finance sector of any company, the decision about dividend policy to be made by the finance manager and director of that company is seen as very delicate and controversial.

Profit Management Depends upon mainly 2 perception and the both have been mentioned in the latter part of this article.

The first perception is

If the company’s management believes that they have earned a good profit and are considering distributing the money from such a profit to their shareholders, then that company should adopt any such dividend policy, with the help of which their shareholders should benefit greatly and the company should be able to easily obtain funding for their upcoming projects.

If a company’s management establishes a steady dividend policy and pays dividends to its shareholders on a regular basis then the company is able to earn the trust of that specific share holders.

However if seen then the high retention and high dividend are desirable for any company, but it is also critical to establish a reciprocal relationship between these two.

Because the more profit you keep, the less dividend you can distribute to your shareholders, and the less profit you keep, the more dividend you can give to your shareholders. In this case, a finance manager’s ability to control earnings is critical.

The second perception is

Suppose a company earns a lot of profit in any particular year and that organization decides not share its valuable earnings with their shareholders if they want to utilize it to expand their upcoming future business.

Under these circumstances, the company’s shareholders do not receive dividend payments, but if the company’s fundamentals are very good then it is quite possible that all of those shareholders will benefited greatly in the future because of company’s business model is very good, and the share prices of that company eventually increase with time, allowing them to earn more money.

Final Conclusion on Importance of Profit Management

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