Why Is Profit Important in a Business?

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Why Is Profit Important in a Business?
A business' sole purpose is to make a profit. (profit image by Michael Shake from Fotolia.com)

Profit is important in any business, especially in a capitalistic society. A business owner who has chosen to provide a service and/or a product to his customers is hoping to keep his customers happy while being compensated for his work. Careful research and planning must occur when starting a business because lack of organisation or poor management can lead to a lower profits. Profit benefits business owners, and also indicates to shareholders how well the company is performing.

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Definition of Profit

A profit can be defined as the additional amount of revenue that is made after all the resources necessary to create the product or provide the service are utilised.

How Profit is Determined

Let's assume you are selling lemonade. The price of the lemonade must include the cost of the lemons, water, sugar, and the cups you are using to serve the lemonade. Any materials necessary to create advertising materials, your time to preparing the lemonade must also factor into the price. After selling a certain amount of lemonade on a consistent basis, you will begin to make more money than it takes to create your product. If you are not making money outside of all of your work, there will not be enough money for you to survive and eventually maintain your business if the costs of cups, lemons or other materials rise.

Profit Relating to Shareholders

In business, the rule for profit is to continually make as much profit for the shareholders. Therefore, a company's chief executive may make decisions at the detriment of employees to maintain and continue making a profit. Shareholders are investing money on a consistent basis in hopes of receiving returns on their investment. If there is no profit, investors will stop investing and business cannot continue. Shareholders can also gauge the success of the CEO based on increasing or decreasing profits. This can determine if the CEO, or other top executives, should be replaced.

Profit for Experimentation

Calculating profit is an indicator of whether changes within the company are successful. For example, when Disneyland first opened, admission ticket prices rose. Though fewer customers came to the park, profits were higher than when ticket prices were lower. The increase in profit benefited shareholders and Disneyland. Profit also determines if a product is losing popularity.

Lessons in Profit loss

When companies begin to lose profit, it's an indication that aggressive business decisions must be made. For example. when consumers were transitioning from tape to compact disc, cassette tape sales declined. This indication of profit loss told businesses to focus efforts on making the transition to compact discs. Similar products include the horse-drawn carriage and zip drives. Continual and significant losses forces companies out of business.

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