Perhaps the most misunderstood and most vilified concept in the private sector business world is profit. For many uninformed people, the word “profit” brings visions of vicious robber barons or greedy tycoons bent on stealing their wealth from everyone else.
Yet dreams of becoming a successful entrepreneur or business person are common among motivated, resourceful professionals. And what they’re looking for is profit. No one goes into business to lose money.
When an entrepreneur decides to start a business, hire people, and create jobs – they are taking a risk. Often times they are taking their life’s savings, and investing – risking – their money on a creative business venture.
Why would anyone take their money out of a safe savings account, and risk it to start a business? To lose their savings? Or, to create a business, and in the process, create wealth? A successful and profitable business is their reward for taking that risk. A successful and profitable business also creates jobs. Conversely, unprofitable businesses terminate jobs. If a business person does not have enough money to pay his employees, he cannot keep them employed.
Economist Steve Horwitz wrote: “What critics of the profit motive almost never ask is how, in the absence of prices, profits, and other market institutions, producers will be able to know what to produce and how to produce it. The profit motive is a crucial part of a broader system that enables producers and consumers to share knowledge in ways that other systems do not.”
Horwitz adds: “Profits and losses provide producers with knowledge of their success or failure – as judged by their own consumers.
Likewise, prices provide us with information on what people value. A product that commands a higher price means that there is more demand for the product than there is supply available. Information provided by prices has another benefit: It helps both producers and consumers make decisions about how to use their limited resources. For producers, high prices encourage increased production, for consumers, high prices encourage limited consumption.”
In order to hire employees and create jobs, profit is vitally important. It is the mechanism by which a business determines what they will spend their money on to make that business prosper, and make sure that they develop their products or services to enhance their offerings, and to attract more customers to their business. Profits help a business spend money wisely, so they can buy equipment – which also creates jobs for those in the equipment manufacturing industry – so that the business can perform better in their industry.
Further, a competitor that has a better product at a better price is the one that is going to attract customers. Therefore, in order for a business to stay competitive, they must constantly improve the quality of their product or service, or they lose customers. When a business performs research and development, markets its product, distributes their product, and services their product, they need employees. That means jobs. So the more successful a company is, the more competitive a company is, the more focused a company is on pleasing its customer base, the better the products, then the more profitable it is and more plentiful the jobs it creates. In other words, better products, better service, more jobs.
Profit becomes even more valuable to a business, and its employees (current and prospective,) when it re-invests in the company and increases the number of workers. When a company grows by taking the profits the company earned over a period of time and improving some aspects of the business, the prospects of hiring additional workers is enhanced.
Profit is an important indicator of how long a company may stay in business using its current cost and pricing standards. A business operating without a profit won’t be in business very long. Conversely, a profitable business will be able to maintain itself during those challenging economic times, and keep workers employed. Profitable businesses hire and keep workers. Unprofitable businesses do neither.
So rather than view “profit” as a negative word, view it as a necessary factor for a healthy business and a healthy job market.