Explain the role of profit in business.
Or
What functions does the profit perform ?
Functions of profit:
Source of income : It is the most important source of income and provides livelihood for the businessman. Everyone has to satisfy his needs and hence no one is expected to undertake business activities without any earnings for the same.
2. Source of finance : Profit is a source of finance for expansion and diversification of business activities, A part of the profits can be retained for increasing the volume of the business. Retention of profit is always considered the best way for carrying out business activities.
3. Efficient working: Profit is required for efficient and
smooth functioning of the business. It is considered as a barometer for judging the performance of the business.
4. Goodwill : Profit helps in building the reputation
or goodwill of the business firms. With profit increasing over time, a business enterprise gains reputation. Such goodwill creates market standing which ultimately helps to raise loans and thereby obtain credit more easily.
5. Reward for risk bearing : Risk is always associated with any business. A person who invests money in the business has to bear the risk also. In the eventuality of loss due to any risk, the businessman doesn’t stop the business. It is the profit element that motivates him to carry on with business even in the case of losses.
6. Social responsibility : Higher profits make better remuneration and amenities possible. It increases the standard of living of workers. A firm with a higher profit is in a position to carry out its social responsibility towards various groups.