The object of a business is not to maximize profit, yet profit has a definite role to play in business
Profit earning is the main objective of every economic activity. A business is also started to earn profits. Profits are needed to cover up costs of production and also to create surplus for further expansion and diversification. Profit earning and not profit maximization should be the objective of a business.
Profit making is essential for business due to the following reasons:
1. Incentive: Profit is the incentive for setting up an enterprise. It provides a stimulus to establish and operate a business. Profit is a return for investing capital and a reward for the labour of an entrepreneur.
2. Survival: Profit is essential for the survival of the business. A firm cannot continue for long if it incurs losses for long. A unit needs replacement of old assets. It has to face adverse situations in the business. It is the profit or surplus, which enables a unit to meet various expenditure, needs and face situations like recession. Profit is a base for absorbing various shocks.
3. Growth: Profit is the main source for the growth of a business. Using one’s own profits for financing expansion and diversification is a best source. A concern must earn fair profits so that it is in a position to finance its growth. Profits are essential to attract more from outside. Even public enterprises are supposed to earn profit to finance expansion.
4. Measure of Efficiency: Profit earning of an enterprise is considered as a measure of efficiency. People judge the performance of a unit from the profits earned by it. The earning of profits over a period of time indicates the success of an enterprise.
5. Social Welfare: Profits also help in fulfilling social goals also. A business is expected to serve various segments of society such as labour, consumers etc. The workers will expect better wages and consumers want quality goods at reasonable prices. All this will be possible only when business earns sufficient profits.
The earning of sufficient profits is necessary for a business enterprise. The owners will expect return on their investments and other people associated with the business also have hopes from it. Even the survival and growth of an enterprise is linked to its earning capacity.
From the above discussion it is clear that profit making is the primary driving force behind every business. If any business enterprise is not earning profit, it will not be able to ensure its survival and growth. But profit making should be clearly distinguished from profiteering, i.e., the sickness of an acquisitive society, to get-rich-quick. Profiteering is an antisocial activity, which leads to consumers’ exploitation, such as, black marketing, hoarding, smuggling, and charging high prices. In the words of Peter F. Drucker, “Profit is not an objective but it is a requirement that has to be determined in respect to the individual business, its strategy, its needs and its risks.”
He further added that there must be multiple objectives rather than a single objective; objectives are needed in all areas on which the survival of the business depends. Besides profit making, there are seven other key areas in which objectives of performance must be set by a business enterprise. These seven key areas are (i) marketing, (ii) financing, (iii) production, (iv) innovation, (v) human organization, (vi) physical resources, and (vii) social responsibility. Thus, profit making is one of the key areas of business and thereby the other areas will be neglected if the profit making or profit earning is adopted as the only objective of business.
From the above study, we conclude that since business is essentially an economic activity, its primary objective is to earn sufficient profits so as to justify its survival and growth, but not the sole objective of business. The spirit of maximization of profits in a business enterprise should be condemned at all levels because it is an antisocial activity and leads to exploitation of consumers and the society at large. However, the amount of profit earned by a business enterprise should be reasonable and satisfactory so as to assist its growth and development.
