Earning of profits is an important objective of business. According to peter F. Drucker, “A business must achieve sufficient profits to cover the risks o economic activity and thus to avoid loss.” Profits are also essential to provide adequate return to the owners or shareholders, to ensure funds for growth and expansion, and to improve the goodwill and public image of the business.
A business must earn adequate profits. This is necessary because of the following factors:
(i) Means of Livelihood.
The entrepreneurs engage in business activities to earn profits as a means of livelihood. By earning sufficient profits, they can lead a decent standard of life through satisfaction of various needs.
(ii) Return to Investors.
The people who invest money in the business expect fair rate of return on their capital. This is possible if adequate profits are earned by the business.
(iii) Reward for Risks.
Profit is considered as a reward for assuming several business risks. An entrepreneur invests capital and undertakes business risk to earn profits. Profit also serves as a protection against those risks which cannot be insured. by building up resaves, business enterprise can face risks like fall in demand, pilferage, breakdown f machinery adverse government policy, etc.
(iv) Source of Finance for Growth and Expansion.
Profits must be earned to provide funds for reinvestment in business. Profitability of the business will ensure funds for its growth, modernization and expansion.
(v) Indicator of Efficient Working.
A business cannot survive for long without earning profits. A business unit which incurs losses for a number of years becomes a sick unit. It may have to bed closed down. Thus, profits may be regarded as an indicator of efficient working of a business. The success of a business can be judged by reference to its ability to earn profits.
(vi) Goodwill or Reputation.
If a business earns good profits, its reputation in the market will increase. Profitability is regarded as an index of performance of those who manage the business. Earning of reasonable profits year after year would enhance the reputation of the business and its management.
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