Role of Profit in the Business and its reasons.

Profit plays a very important role in the business for its survival, expansion/growth, and development.

What is the Role of Profit in the Business?

Like nourishment is important for the survival of human being accordingly profit is important for the survival of the business. Profit is the monetary reward/income for stakeholders or owners which gives them the motivation to stay connected with the business.

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Various reasons to earn profit:

There are various reasons that make the Role of profit in the business very important. these are shown as follows: –

1) Survival for long period:

Businesses cannot survive for long period without profit because profit is only the source of income of the owner. The necessaries of the businessman and his family only fulfill the earned profit. 

2) Growth:

The expansion means the growth of the business. Profit is an important organ of the business and acts as an internal and cheaper source of funds for investment in big business projects.

3) Indicator of efficiency:

The growth/success of the business only measured by the efficiency of performance and earned profit.

let’s take an example of Apple company:

1) In 2018, Apple announced its highest yearly revenue with 265.6 billion U.S. dollars. 

2) In the 2020 financial year (October 2019 to September 2020), Apple’s revenue came to a total of 274.52 billion U.S. dollars.

Apple has been millions of sales because of its efficiency in operations related to the product which is the main source to earn revenue.

4) Helps in creating goodwill:

The market value of the shares increases only with the help of an increase in profit. Even people prefer to join in profit earning companies as these are able to offer high returns.

A company with high profitability can raise funds or loans very easily because of goodwill.

5) Reward for risk:

Profit and risk are related to each other. High risk, the more is the profit. Every business should have the ability to bear risk because market conditions can be changed at any time or if a company wants expansions like:(opening other subsidiary offices in other cities or adding more products etc.). So in the business, every type of decision should be taken by assuming risk.

For investing in big projects every company needs adequate funds, these need only fulfill if the company has some surplus profits.

Thanks for reading the topic.

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Also, Check our Tutorial on the following subjects: 

1. https://tutorstips.com/financial-accounting/
2. https://tutorstips.com/advanced-financial-accounting-tutorial/