Profit is simply what is left over from the sale of a product after all of the expenses necessary to create it have been paid. It is an essential aspect of business in the capitalist, free market economic system and is the measure of success and failure of a business. With profit, businesses can continue to exist and grow, but without it, they simply cannot exist.
While profit determines the success and viability of a business, it is also the only means for jobs to be created. Employment is dependent on businesses being successful and thus, profitable, allowing the business to employ workers in its pursuit to become more profitable. In this sense, both the business owner and the employees of a business have the same incentive. The business owner’s incentive for the business to make a profit is that the business is at least sustained, allowing him more income to either grow the business, save or pay himself back for a job well done. The employee’s incentive for the business to make a profit is that the business is at least sustained, allowing him to continue to be employed. Employment happens in stages in the genesis of a business. In a sole proprietor business, the one business owner develops his business into one that turns a profit. He is the one employee of the business. As the business becomes more profitable and eventually grows (more customers), the nature of business requires more responsibility, which creates more work to be accomplished. As growth continues, the work required will become so much that the one employee (the business owner) cannot do it by himself and will eventually have to hire someone else to help him. Employment is created by successful businesses, which are only made successful because of profit.
Profit is the great equalizer in business because it dictates the winners and losers. The winners in business (the ones that are profitable) are the businesses that have found a way to produce a product efficiently enough to minimize expenses and maximize income (revenue). The losers in business (the ones that failed to become profitable) are the businesses that were unable to find a way to minimize expenses and maximize revenue. No matter how good or beneficial the product is, if it can’t be manufactured in a way that produces a profit, it will not continue to be made. The presence of profit indicates that there is some efficiency in production but it doesn’t necessarily mean it is the most efficient. That is the ever present quest of a business, to become as efficient as possible in order to maximize profits. When profits decrease or even disappear (expenses exceed revenue), then there are present some inefficiencies in production that need to be addressed. The winners address these inefficiencies effectively and the losers do not. When governments intervene in this process and “bail out” certain businesses (or even whole industries), they disincentive the business efficiency and delay the necessary changes needed for them to improve their efficiency, at the expense of the businesses that have been successful in being efficient.
Entrepreneurs (business owners) that start businesses do so at a huge risk. They risk their own money (and sometime other’s) in order to venture into a business with the hopes of being successful, but there are never any guarantees for success. Many times, for one reason or another, these ventures end up losing money and fail. Their reward for not operating efficiently enough to be profitable is the termination of the business. This is the negative side of business risk. For the successful business ventures, the reward for risking their own money is the profit that is generated from the business. For all of the work that goes into making a successful business, the reward is great. And the incentive of this reward of profit makes the business owner want to continue to sustain his business.
Economics is life.