Profit Level

The level of profits earned differ from enterprise to enterprise. In general, the nature of the product, hold on the market, quality of management and monopoly power would by and large determine the profit earned by a firm. A priority, it can be generalized that a firm dealing in a high quality product, having a good marketing arrangement and enjoying monopoly power in the market, is likely to earn high profits and vice-versa. Higher profit margin would improve the prospects of generating more internal funds thereby contributing to the working capital pool. The net profit 'is a source of working capital to the extent that it has been earned in cash. The cash profit can be found by adjusting non cash items such as depreciation, outstanding expenses and losses off, in the net profit. But, in practice, the net cash inflows from operations cannot be considered as cash available for use at the end of cash cycle. Even as the company's operations are in progress, cash is used for augmenting stock, book debts and fixed assets. It must, therefore, be seen that cash generation has been used for furthering the interest of the enterprise. It is in this context that elaborate planning and projection of expected activities and the resulting cash inflows on a day to day, week to week and month to month basis assume importance because steps can then be taken to deal with surplus and depreciation.

The availability of interns funds for working capital requirements is determined not merely by the profit margin but also by the manner of appropriating profits. The availability of such fun would depend upon the profit appropriations for taxation, dividend, reserves and depreciation.

Share This