Question

Attempt the following.

Explain the importance of profit in business.

Answer 1

Business is such activity which involves earning profit. Any business organisation, whether small or large, production unit or service industry; works for getting maximum profit. Profit plays a very important role in business.

The role of Profit is explained below:

1. Growth and Expansion: Profit acts as an internal source of raising funds. Businesses can keep aside excess profit and use it for their own expansion or diversification purpose. Expansion results in more profit, which can be used for other purposes.
2. Research and Development: When a business gets good profits it can spend money on research and development. Research and development help to find out the processes that help to reduce the cost of production and provide better quality products. This helps to increase production ultimately resulting in an increase in profit.
3. Returns to Investors: The owner of the business needs returns on the money he has invested in the Business. These returns are in the form of Profit. If there are good profits, the businessman gets fair returns on his investment.
4. Means of Livelihood: A business is mainly carried on forgetting the livelihood. A result of a business is profit. Thus the main role of Profit is to help the businessman earn his living.
5. Increasing Efficiency: Profit acts as a motivating factor. A businessman who is working hard for the business and gets substantial profits gets a motivation to work hard. Profit thus helps in increasing efficiency. Similarly, an employer can give good remuneration to the employees when there is a good profit. This helps to increase the efficiency of the employee also.
6. The reward for Risks: Every business is exposed to various types of risks. A businessman has to consider these risks. As a businessman takes risks and performs business activities, buyers get the necessary commodities. The result of these business activities is profit. Profit in this case acts as a reward for the risk taken by the businessman.
7. Survival: The most important role of profit is to help the business to carry on the activities continuously. The survival of a business depends upon the continuous supply of finance. Profit enables a business to continue with the uninterrupted supply of funds. Thus profit plays a vital role in the business. Profit is an inevitable part of every business. It helps a businessman to earn his livelihood, carry on research and development activities, and most importantly survive the business.