Question

Long answer Type questions

Explain the importance of profit in business.

Answer 1

Earning profit is the sole motive of any business activity. It is not possible for a business to sustain itself for a long time if it does not earn sufficient profits. This is because, for a business to continue, a part of the profit has to be reinvested in the business. Reinvestment also ensures the growth prospects of a business and enhances its future profit-earning capacity. Profits are regarded as the reward for undertaking the risks associated with a business. If a business is not earning profits, then it is considered a non-viable venture.

The following points highlight the role of profit in a business:
i. Source of income: Profit from business forms the source of income and livelihood of every businessman.

ii. Source of finance for future growth: A part of the profits is reinvested by the businessman into the business to facilitate its growth.

iii. Indicator of efficiency: Profits earned by a business can be considered an indicator of the efficiency of the business. In other words, higher profits indicate greater success of a business and vice versa.

iv. Enhances the business’s standing in the market: Over a period of time, if a business earns sufficient profits, it gains market standing and reputation.

v. Reward for risk taking: Profit is said to be the reward or compensation for the risks taken in a business.

vi. Return to investors: As a business earns profits, it gains reputation and goodwill in the market; this, in turn, increases the market price of its shares. In this way, profits also increase the return for the investors.