Profit earning is essential in business due to the following reasons:
Profit is the driving force behind every business. It inspires people to start an enterprise and to work hard for making it successful. Profit is the reward for undertaking the risk of business.
Profit is essential for the survival of business and it ensures the continuity of an enterprise. In the absence of profits, an enterprise will eat up its own capital and ultimately close down.
With the help of profits business can replace obsolete machinery and equipment and thereby maintain its capacity to create wealth.
According to Drucker, “profit is the risk premium that covers the costs of staying in business.” Profits help business to face trade cycles and other shocks. Profits are also required to reward various factors of production.
Profits are the biggest source of capital for expansion and growth of business. It serves as a means of self-financing. In addition, profits enable business to attract capital from outside. Nobody likes to invest money in a loss making enterprise.
4. Measure of efficiency:
Profit is considered to be the index of success in business. People judge the performance of an enterprise on the basis of profits earned by it.
5. Prestige and recognition:
A loss making business enjoys no goodwill. Profits provide economic power and status to businessmen. Higher profits increase the bargaining strength and credit worthiness of business. Moreover, only a profit making business can provide service to society.
Maximisation of profit but the achievement of sufficient profits to cover the risks of economic activity, and thus, to avoid loss the businessmen who keep their customers, employees, investors and the society satisfied, will definitely earn goods profits.” Urwick has very aptly summed up the relevance of profit motive in business as.
“Earning of profits cannot be the objective of a business any more than eating is the objective of living”. A business cannot survive without profit just as a person cannot live without food. But profits cannot be the sole purpose of business just as eating is not the aim of life.
However, profits must be earned by satisfying the wants of customers and after paying workers their dues. In the words of Arvind Mafatlal, “no business or industry is run philanthropically. It has to make a profit for further growth. But this profit cannot be at the expense of labour and the community at large.”
Economic and social objectives of business are not contradictory. They go hand in hand in the long run. No business can earn profits without satisfying customers and other sections of society similarly, business cannot render service without earning profits.
Thus, the real objective of business is to earn profit by serving the interests of consumers, employees, investors, Government and the society as a whole.