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.
of Profit in Business
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.
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.
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 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.
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.
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.
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