Question

1. Explain and discuss the differences and similarities between the circular flow and entrepreneurial profits by providing specific examples so that the differences and similarities are evident, and it is clear how businesses can be categorized as to whether they are earning entrepreneurial profits or part of the circular flow.

Answer 1

This is my answer

When we look at any Business from broad perspective, it is a flow of cash in the value chain. Cash is converted into one form to another and finally we have cash which we have invested. Plus there is some excess or deficit. If it is excess then we call it as profit and of it is deficit then we call it as loss.

It is very difficult to know whether the business is making profits or it is just the circular flow of cash, until the profit is sizeable.

Let us understand this with the help of an example of construction industry.

We are in a business Building residential building and selling to individual buyers. The cash flow (Outflow) starts as below : -

- Purchasing/ acquiring the land for construction.

- Doing all the legal and procedural activities required prior to and after the land acquisition.

- Acquiring the construction equipment on rent or purchase.

- Purchasing all the materials required for construction (This is we done in parts at various stages of construction).

- The construction workers, engineers and other technicians for furnishing, plumbing, electric wiring, etc needs to be paid wages/ salaries for its activities.

All these cash out flow will add up to total outflow from the business.

These will be sold the individual owners and cash inflow is received from the bank in parts at various stages of construction and finally at the end the remaining amount.

The expected (Budgeted) outflow and projected inflows are monitored by the accountants at various stages of the project to ascertain that there is predefined surplus in form of profit at the end of the project.

Thus whether the business is making the profit is known at various stages of business and of course at the end by the amount of excess/ surpluses the business generates.

Thank you...