Question

What is goodwill? What are the factors that effect goodwill?

Answer 1

Goodwill is an intangible asset of a firm. It is the value of a firm’s reputation and its good brand name in the market. A firm earns goodwill by its hard work and thereby winning the blind trust and faith of the customers by fulfilling their demands in both qualitative and quantitative aspects. A positive goodwill helps a firm to earn supernormal profits compared to its competitors that earns normal profits (as their goodwill is zero). In other words, goodwill ensures greater future profits as there will be greater number of satisfied customers in the future. As in the words of Lord Eldon, “Goodwill is nothing more than the probability, that the old customers will resort to the old place.”

Characteristics of Goodwill
The following are the characteristics of goodwill.
1) It is an intangible asset.
2) It is not a fictitious asset.
3) It is difficult to ascertain the exact value of goodwill.
4) It enhances the future as well as the present earning capacity of a business.
5) It helps in earning supernormal profits against the normal profits.
6) It assists the business to enjoy its upper hand over its counterparts.

Factors Affecting Goodwill
The following are the important factors that affect the goodwill of a firm.
1) Quality Products: If a company produces product of the best quality and in large scale, then automatically the company earns more goodwill.
2) Location: If a business islocated at easily reachable and convenient place, then more number of consumers will be attracted again and again which will lead to increase in sales and, therefore, the firm will earn higher goodwill.
3) Management: Efficient management leads to cost efficiency and increases productivity. If a firm’s management is efficient, then superior quality products can be produced at lower cost .These can be sold at lesser price. Superior quality at lower price enables a firm to earn higher goodwill.
4) Market Structure: If a firm is operating in a monopoly market with no close substitutes, then there will be more goodwill of the firm.
5) Economies of Scale: If a firm enjoys special advantages like, continuous supply of power, fuel and raw materials at a low price and produces quality product at a large scale, then the firm enjoys higher value of goodwill.