Question

What are the reasons why a business would not play it safe and keep all of the profits in a bank?

Answer 1

A Bank ensures safety of your money as it employs various mechanisms including secure premises, vault, insurance, etc.

In addition, it enables you to earn interest on the money you keep in a bank. A bank ensures that the funds you place are invested in appropriate avenues to ensure that it can pay you back the principal plus the promised interest.

But as far as a business is concerned safe deposit or meagre returns are not their primary objectives.

Businesses exsit to maximize profits for the stakeholders. So playing safe by depositing in a bank is not the best thing that a business can do with their finds.

Profit Maximization

According to economist Milton Friedman, the main purpose of a business is to maximize profits for its owners, and in the case of a publicly-traded company, the stockholders are its owners. Others contend that a business’s principal purpose is to serve the interests of a larger group of stakeholders, including employees, customers, and even society as a whole. Philosophers often assert that businesses should abide by some legal and social regulations. Anu Aga, ex-chairperson of Thermax Limited, once said, “We survive by breathing but we can’t say we live to breathe. Likewise, making money is very important for a business to survive, but money alone cannot be the reason for business to exist. ”

Reinvesting in your business is critical to any company that wants to grow and take in additional resources and capital that would otherwise go to competitors.

Increased Profit

A primary business reason to reinvest in growth is to increase revenue and profit. By attracting new customers, adding new business locations or adding new products, your business can increase its number of revenue streams and hopefully generate increased profit from them. Adding new sources of income also helps insulate your business from the risks of operating with one primary source of income in the event that source dries up at some point.

New Capital

New or developing markets, or emerging customer segments, are ripe for the taking. While small businesses especially might consider sticking to what they know and staying comfortable, the race for new capital and income streams is critical. If your competitors gain access to those new market opportunities because they invest in growth, they also get new funds to use for marketing, which increases demand, and further reinvestment in growth going forward.