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How important are the terms 'efficiency' and 'p...

How important are the terms 'efficiency' and 'profitability' for a business entity?

How important are the terms 'efficiency' and 'profitability' for a business entity?

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Chiranjibi Chapagain Mar. 22, 2018

Enterprises pursue multiple objectives rather than a single objective. In general, we may identify a set of different business objectives pursued by a large cross-section of enterprises. Efficiency and profitability are two of the important objectives of any business. Efficiency is the relationship between input and output whereas profitability is the relationship between profits and investments.

Efficiency

Efficiency is a measure of whether the right amount of resources have been used to deliver a process, service or activity. An efficient process achieves its objectives with the minimum amount of time, money, people or other resources.

Business enterprise seek efficiency in rationally choosing appropriate means to achieve their goals, doing things in the best possible manner and utilising resources in a most suitable combination.

In a sense, efficiency is an economic version of the technical objective of productivity – designing and achieving suitable input output ratios of funds, resources, facilities and efforts. Efficiency is a very useful operational objective.

Profitability

Most organizations operate because their owners want to maximize wealth. Therefore, improving profitability is one of the prime objectives of a business. When a business achieves incremental profit margins, it shows that the operations of the business are probably reducing costs proportionally .

It is generally asserted that private enterprises are primarily motivated by the objective of profit. Some may go even further and emphasise that profit is the sole motive of business enterprises. All other objectives are facilitative objectives and are meant to be serve the profit motive. It is pointed out that private business enterprises are operated on behalf of and for the benefit of the owners who have assumed the business risk of investing their funds.

How important are the terms 'efficiency' and 'profitability' for a business entity?

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