Question

In your own words, explain the role of profit in an organization. Include AT LEAST two positive aspects of profit and two negative aspects of profit.

Answer 1

In all business undertakings in the private sector, the main motive is to earn profit. Profit is the driving force before and after entering into the business field. Infact profit is the oil which drives the wheels of business. Profit is the total revenue from sales minus the total cost of resources employed by the entrepreneur.

1. Sources of Income

Investors invest their money in the business with the sole purpose of earning profit, since profit is a source of income, it is therefore provides the owners of business the mean with which they and their family members can live a comfortable life.

2. Continuity of Business

The incentive of earning profit keeps the man engaged in business activities. A business can only grow and gain strength if it earns profit. So earning of profit is necessary for the continuity of business.

3. Expansion of Business

One of the roles of profit in business is that businessman retains and reinvests a part of its profits in business undertaking stands on sound footing. It can expand and diversify business not only from reinvestment of funds but also getting loans from external sources for business.

4. Reward of Risk Bearing

Profit is the reward for bringing new products or processes to the market. It is a reward for a risk successfully undertaken. Profit, therefore, is a reward for the future which is uncertain.

5. Profit and Economic Development

Another role of profit in business is economic development. Profit and economic development are closely related with each other. If the firms are not earning profit then there is no economic progress in the country. If there is no economic development there is no profit to the business.

6. Profit Acts as Measure of Efficiency

Profit acts as an index of performance for business, if the business firms are earning profits. It shows that the country is progressing satisfactorily

Profit is a very important concept for any business – particularly a start-up. Profit is the financial return or reward that firms or entrepreneurs aim to achieve to reflect the risk that they take.

Given that most firms and entrepreneurs invest in order to make a return, the profit earned by a business can be used to measure the success of that investment.

Profit is also an important signal to other providers of finance to a business. Banks, suppliers and other lenders are more likely to provide finance to a business that can demonstrate that it makes a profit (or is very likely to do so in the near future) and that it can pay debts as they fall due.

Profit is also an important source of finance for a business. Profits earned which are kept in the business (i.e. not distributed to the owners via dividends or other payments) are known as retained profits.

Retained profits are an important source of finance for any business, but especially start-up or small businesses. The moment a product is sold for more than it cost to produce, then a profit is earned which can be reinvested.

Profit maximization is not considered to be the ultimate goal of business because corporate social responsibility of utmost importance. If a business does not treat the customer well or give back to their community they lose their customers. This can result in an ultimate loss of the business, or loss of profits if they are not socially responsible.