Grandpa, my school teacher says that profit is a bad word. It’s okay?
It’s certainly not right, but maybe it means that some profits are dirty because they are made by lying, cheating and selling poor quality products. This happens, but the companies that do this don’t last long and the people who do it can be fined or jailed.
Most companies are better than this. A successful business generates income by selling things or providing services that people want. Consider a simple example like a restaurant. The food has to be good, the service excellent, the price not too expensive, and the business owner has to obey many health and safety laws. You have to pay suppliers, pay staff, pay for electricity and gas, pay municipal fees, pay taxes, and pay many other costs.
You have to bring in money from your clients and you have to pay all your costs. The money that comes in has to be more than the money that goes out. Otherwise, you will not be able to continue. The difference between income and costs is profit. Therefore, profit is far from being a dirty word. It is an essential sign that the business is running properly and will survive.
There are many other benefits that result from a business making a profit. Can you think what they are? First of all, the business owner will have the money to invest in the future: new equipment, better furniture, maybe even a new or additional premises.
Second, you will be able to repay the money you may have borrowed to start the business. He (or, of course, she) will be able to save some money or invest in pensions for himself and his staff. The business person who makes a profit can donate to charities and many successful entrepreneurs do.
From a business point of view, there is yet another reason to appreciate the value of profits. Profits make a business more valuable, not just by putting money in the bank, but, more importantly, by creating something that can make money in the future. The value of a business is not just its property and money in the bank, it is the value of the profits it can make in the future.
Let’s say our restaurant owner starts out by buying a run-down property that has a bad reputation and has virtually no customers, so he doesn’t make a profit. It’s such a disaster that he was able to buy it for $ 50,000. With hard work, good cuisine, and good service, you can build a successful business that five years later is thriving and making a profit of $ 100,000 per year. You’ve probably reinvested some of your earnings each year to buy the best kitchen equipment, and you spent money on décor and furniture, so your total investment could be an additional $ 200,000. The good news for him is that he can, if he wishes, sell the business for more than his total investment of $ 250,000. Why? Because the company has profits of $ 100,000, which gives additional value to the company. Such a business could easily be worth $ 750,000 or more.
This is the wonder of earnings. The business owner is happy, customers are happy, jobs have been created, taxes have been paid, the local area has a smart restaurant, everyone has benefited, and no one has been hurt. This is the magic of business that I will tell you much more about in future articles.
