ROLE OF PROFIT IN BUSINESS
ROLE OF PROFIT IN BUSINESS
Profit can be defined as the reward given to entrepreneur for bearing risks inherent with business. On one side it is the residual balance after meeting all costs, and on the other side it is the return to the efforts taken by the entrepreneur in organising and operating the business.
Role of Profit in Business
Profit is a means of livelihood to the entrepreneur
An entrepreneur establishes and operates an enterprise as his career, as a means of his livelihood. He spends all his money and efforts for business, and profit is the only return he expects from it, on which his life is supposed to build upon.
Reward for Bearing Risk
According to Hawley, profit is the price of bearing risk in business. Risk is the unavoidable feature of business. It exists in almost all areas of business such as production, purchase and distribution of goods and services. Entrepreneur courageously faces all these risks and thus gets eligibility to get profit in return.
Survival of Business
Business which cannot make profits cannot exists for long. It is the most powerful motivating factor which makes entrepreneur active and confident. Profit is the real inspiration and energy behind success of business. Business can grow and succeed only if it makes profits.
Growth and Development
Growth and development of business are results of profitability. Growth, expansion and diversification are costly affairs and therefore require additional investment of capital. A business which makes profits can effectively make use of this profit for reinvestment and thus it gets opportunity to grow. A loss-making firm can neither finds funds, nor gets loans from financial institutions for reinvestment.
Goodwill is the result of better performance. It can be attained only if the business can serve various interest groups according to their expectations. Thus, it should be able to make timely payments to creditors and employees, charge fair prices to products and services, give reasonable return to investors, meet all social responsibilities as far as possible etc. Business requires money to carry on with all these, and profit is the only source. Thus, profit gets relevance as it is the base on which goodwill is created.
Better Employee Remuneration
Business firms which are financially sound can offer better remuneration packages to its employees. Firms which make profits will be financially sound and they can offer better packages. A loss-making firm will find it difficult to even to give minimum wages and salaries to its employees.
Criterion to Evaluate Firms
Business firms are evaluated on the basis of profitability. It means that only profit-making firms are positioned as successful. Profitability denotes, how efficiently the firm makes use of its resources. Efficient utilisation of resources establishes managerial efficiency and profit is considered the result of such management performances.
Basis of Taxation
Government levies taxes on business on its profits. Business firms which make higher profits need to pay higher taxes. In other words, only profitable business firms get an opportunity to serve society and government through taxes.