# economics

Profitability is a business indicator , the measure of which is efficiency . It describes the relationship between the success achieved and the effort ( costs ) required for it .

## General

The economic subjects ( private households , companies and the state with its subdivisions such as public administration , state-owned companies , municipal companies ) are required to deal rationally with scarce resources ( rational principle ). Profitability is therefore not only the selection principle in business administration , but also in public business administration . In order to achieve profitability, either a given yield ( minimum principle ) or the greatest possible yield ( maximum principle ) can be achieved with as little effort as possible . In both cases, there is a contrast between expenditure and income, with economic efficiency if the income is greater than the expenditure involved:

${\ displaystyle {\ text {Profitability}} = {\ text {Yield}}> {\ text {Expenditure}}}$.

Correspondingly, it is inefficient if the effort exceeds the yield achieved. Economic efficiency issues are also in the foreground in the cost-benefit analysis and the cost-effectiveness analysis .

The economic efficiency principle is thus a specific expression of the rational principle. Compliance with economic efficiency as a behavioral maxim also enables the goal of maximizing profit or benefit to be achieved . There is thus target harmony between these goals . The public budgets are even legally obliged under Section 7 (1) BHO to observe the principle of economy and economy when drawing up and executing the budget .

## Difference between effectiveness and efficiency

Working effectively means working in such a way that a desired result is achieved. Working efficiently means working in such a way that the result achieved and the means used are as cost-effective as possible and the benefits are greater than the costs ( economic principle ). The term costs does not only mean monetary costs and not only costs that arise immediately, but all negative consequences of the action.

• Effectiveness describes the degree of target achievement (effectiveness, quality of target achievement).
${\ displaystyle {\ text {Effectiveness}} = {\ frac {\ text {Result}} {\ text {Goal}}}}$
• Efficiency is a measure of profitability (cost-benefit ratio). [Note]
${\ displaystyle {\ text {efficiency}} = {\ frac {\ text {result}} {\ text {effort}}}}$

Profitability exists when the quotient of the result (e.g. the yield) and the effort is equal to or greater than 1:

• When there is efficiency , there is economy.${\ displaystyle> 1}$
• When there is efficiency , there is cost-covering profitability.${\ displaystyle = 1}$
• If there is efficiency , it is inefficiency.${\ displaystyle <1}$

So economy requires mathematically that in prices Rated relationship between output quantity ( english Output ) and required quantity ( english input ).

### Examples that show the difference

• You can put out a fire with water or champagne. Both lead to the goal and are therefore effective. Putting out the fire with champagne is more expensive and therefore not efficient. However, if water or another suitable extinguishing agent was not available, it can also be efficient to put out the fire with champagne if the benefits are greater than the costs of the champagne.
• In the following example, the goal is to cut as many trees as possible . The trees can be felled with a chainsaw or a file. A chainsaw can cut more trees per unit of time than a file. That is why the degree of target achievement is higher with the chainsaw. The chainsaw is therefore more effective. If you take the tree cutter's wages as costs, the chainsaw is also more efficient, since the "number of trees felled / wages" is higher with the chainsaw than with the file. The chainsaw uses gasoline while the file works "without" energy consumption. If you only look at the cost of gasoline, the file is more efficient.
• In a mathematical example, the fraction can be used as an estimate , which is accurate to 6 decimal places. Using the precalculated result “3.14159265358979323846” in a formula increases both efficiency, since the fraction does not have to be calculated, and effectiveness, since the result will be more precise than with the estimate. An elaborate formula for calculating an accuracy of several hundred decimal places increases the effectiveness once again, as one comes closer to the goal of the exact result, but lowers the efficiency, since the calculation causes more costs due to the increased effort. A 100% effectiveness cannot be achieved numerically because it cannot be represented by a finite number of decimal places . However, if only a certain number of decimal places can be processed due to technical restrictions, maximum effectiveness is achieved as soon as this number of decimal places is calculated correctly.${\ displaystyle \ pi}$${\ displaystyle {\ tfrac {355} {113}} \ approx 3 {,} 141592}$${\ displaystyle \ pi}$${\ displaystyle \ pi}$${\ displaystyle \ pi}$
• The German proverb: "Shoot at sparrows with cannons" also thematizes the difference between effectiveness and efficiency: If the sparrows are hit, the intended goal is achieved; a lighter hunting instrument (such as a slingshot) would have made it possible to achieve this goal far more cheaply.

### The distinction between effectiveness and efficiency according to Peter F. Drucker

A common, especially in the English-language economic literature distinction between Effectiveness ( "effectiveness") and Efficiency ( "efficiency") goes to Peter Drucker back to the following in an article in the Harvard Business Review:

“It is fundamentally the confusion between effectiveness and efficiency that stands between doing the right things and doing things right. There is surely nothing quite so useless as doing with great efficiency what should not be done at all. "

In German this is often translated as follows:

• Effectiveness: "Doing the right things."
• Efficiency: "Doing things right."

In his book The Effective Executive , Drucker later wrote:

"[...] the executive is, first of all, expected to get the right things done. And this is simply saying that he is expected to be effective […] For manual work, we need only efficiency; that is, the ability to do things right rather than the ability to get the right things done. The manual worker can always be judged in terms of the quantity and quality of a definable and discrete output, such as a pair of shoes. "

In this context, however, Drucker wanted to show the difference between the tasks of company management and those of employees, so that the word efficiency would be translated here rather as performance .

## Difference between profitability and productivity

While the economics costs / expenses to income / revenue recognized in relation to dealing productivity with the juxtaposition of output quantity / output to input quantity / input. The economics are therefore value-based sizes based on productivity, however quantitative .

## Difference between profitability and profitability

The profitability is the ratio between erzieltem success (z. B. earnings ) and employed capital (total or equity). Here the capital, i. H. the value measured in money, put in relation. Profitability is a measure of success and is expressed as a percentage.

In terms of profitability, the yield can only be used as an increase in value as the value of goods sold or only as a service rendered in monetary value. The effort can also be used in working hours, material requirements or other services converted into monetary value. Profitability is a measure of economy or efficiency ; it is dimensionless.

The synonym for economy is, among other things, economy .

## Profitability in production planning

The production and cost theory form the theoretical basis of production planning.

The aim of cost theory is to determine the most cost-effective method for a given product quantity. The key figure in cost theory is profitability.

${\ displaystyle {\ text {Profitability}} = {\ frac {\ text {Revenue}} {\ text {Costs}}}}$

Here, too, the economic viability is given if the quotient of revenue and costs is equal to or greater than 1. If the result is 1, the production was only cost-covering.

## Assessment of the profitability of a company

An assessment and control of the profitability of a company can be made possible by turnover figures. The costs are compared with the services.

Turnover indicators are:

## Method of profitability calculation in the investment calculation

The profitability calculation examines one or more investment projects for their advantages when investing under certain conditions. Static or dynamic methods of profitability calculation are used in the investment calculation .

Disadvantages of the static methods are both their short-term approach and the fact that they do not take into account the timing of deposits and withdrawals .
• Dynamic methods of profitability calculation are:
The dynamic procedures take into account both the valuation of incoming and outgoing payments according to their timing as well as the precise recording of incoming and outgoing payments during the useful life.

In the private sector , as a rule, the aim is not the greatest possible profitability, but the greatest possible profit . Depending on the type of market, this has consequences for the profitability of the private sector. While the quantity adjusters can pursue both goals (profitability and profit maximization) at the same time, the monopolist can limit the quantity offered and at the same time - offering it at uneconomical unit costs - maximize its profit.

## Remarks

[Note]Efficiency has many meanings (see Definition of Efficiency ). When differentiating between effectiveness and efficiency, however, it is always about efficiency in the sense of profitability.