ROLE OF PROFIT IN BUSINESS
Profit earning is the main objective of every economic activity. A business is also started to earn profits. Profits are needed to cover up costs of production and also to create surplus for further expansion and diversification. A business cannot survive for long in the absence of profits.
"Earning of profits cannot be the objective of a business any more than eating is the objective of living." -Urwick
Profit earning and not profit maximisation should be the objective of a business. A business should not indulge in any type of exploitation for the sake of increasing its profits.
Profit making is essential for business due to the following reasons :
1. Survival. Profit is essential for the survival of an enterprise. No unit can continue for long if it incurs losses for long. A unit needs replacement of old assets. It has to face adverse situations in the business. It is the profit or surplus which enables a unit to meet various expenditure needs and face situations like recession. Profit is a base for absorbing various shocks.
2. Expansion and Growth. Profits are the main source for the growth of a business. Using one's own profits for financing expansion and diversification is the best source. A concern must earn fair profits so that it is in a position to finance its growth. Profits are essential to attract more capital from outside. Even public enterprises are supposed to earn profits to finance expansion.
3. Measure of Efficiency. Profit earning of an enterprise is considered as a measure of efficiency. People judge the performance of a unit from the profits earned by it. The earning of profits over a period of time indicates the success of an enterprise.
4. Reward for Bearing Risk. Profit is the reward given to a businessman for bearing risks. A businessman invests money in business with a hope to earn profit. The desire to earn profit motivates a businessman to face uncertainties and unexpected risks. Profit and risk are directly related to each other. The more the risk and more the profit, the lower the risk, less is the profit.
5. Better Reputation and Goodwill. The profit earning businesses have better reputation in the market as compared to those facing losses. The higher rate of profit helps in creating goodwill for the business. Higher profits also help in the increase of value of shares. The companies earning higher profits are able to arrange loans and obtain credit more easily.
Role of Profit in Business
Profit Maximisation Should Not be the Sole Objective of Business
Profit earning is required for running, survival and growth of a business but profit maximisation should not be the sole objective of a business due to following reasons:
1. Corrupt Practices. In order to increase profits, a business may indulge in corrupt practices like hoarding, black marketing, adulteration, etc. Such practices bring bad name to the business and may attract punishments under some laws.
2. Ignoring Interests of Workers. The workers may not be paid fair wages in order to reduce costs. It will demotivate the workers and they will not work to their full potential. Such practices may ultimately lead to losses instead of increasing profits.
3. Ignoring Long Term Interests of Business. Profit maximisation may be a short term objective but in the long run the business will be the looser. The business may ignore social responsibility in order to save money and increase the profits but it may lead to adverse situation in the long run.
It can be concluded that profit earning through service of society should be the real objective of business.
NEXT
.jpg)
