What Are the Benefits of Making a Profit?
While making a profit is a simple and common objective for any for-profit business, company leaders surprisingly sometimes take their eyes off this goal. Profit is distinct from revenue. You can lower prices or invest heavily to generate revenue, but if your costs are too high, you don't make profit. Earning a bottom-line profit provides several major benefits.
The most direct tangible advantage of earning profit is that you have a chance to retain earnings and increase your equity position. In accounting, retained earnings is your accumulated net profit over time. In essence, if your company makes money, it increases its financial position and company value. Without profit, you may eat away your cash reserves and make your company less attractive to potential investors, creditors and partners.
Business profit is the equivalent of income for owners. In small businesses, owners often take a draw or share of income in the form of periodic distributions or dividends. For sole proprietors or partners in a small company, company profit may provide a sole or primary source of income that owners rely on to provide for themselves and their families. If the company doesn't make money, owners may go into debt or have to find other employment.
Companies often use profit to invest in business growth. This is usually a contrasting way to use retained earnings as opposed to paying dividends. With profit, you can invest in new buildings, equipment, labor, supplies and technology infrastructure. This can create a domino affect, leading to more profit in the future. Additionally, profitability makes your business more appealing to banks and creditors, which gives you possible access to loan funds for growth.
An indirect benefit of making money is that it positively impacts company morale. Owners naturally feel better about their time, energy and monetary investment in operating the business. Employees may also take pride in knowing they work for a profitable, successful company. Additionally, profit allows a company to operate with a more employee-friendly approach regarding strong compensation and resource provision. This can instill greater faith and a sense of security in workers.