How a profit is made
Broadly speaking, profit is the surplus remaining after total costs are deducted from total revenue.
It is the best known measure of success in an enterprise.
Importance of Profit in Business
One of the main objectives of a business activity is to make profit. Businesses having other goals as their main objective may also cease to survive if they cannot make profit in their operations.
- Reward for risk taken: Profit is a reward for risk taken by the entrepreneur in the business. It acts as a motivator for the entrepreneur
- Profit is an indicator of efficiency: Profit is a yardstick that tests the efficiency of the business firm. Specially for lending institutions such as banks or creditors, a profit is one of the main factors while deciding to lend money or not.
- Source of Finance: Retained profits, over a period of time, can form an important source of internal finance for the business not only for expansion but also during rough times.
- Profit is essential for survival: Any business cannot sustain if it does not make profit in the long run. Profit enables the business to grow, helps employee motivation, eases negotiations with banks, attracts investors, and gives clients and customers a confidence in business.
