In some circles, profit is a dirty word. Profits are maligned as being theft from the public good, the end result of greedy business, taking advantage of the poor working stiffs. Give me a break! Over in the eastern bloc, they tried to operate a society free of profit, it had the name of communism, and it was the most miserably failed economic system ever created. It kept people destitutely poor, scared, miserable, and essentially in a prison. Yet there are those today, and most vestiges of socialistic thinking reside in academia, they’re called tenured professors, that actually believe that socialism just needed to be done better, more purely, to have worked. It does not work, it never did work, it will never work. It is contrary to human nature, and as such, it must be imposed by a dictatorial state. It cannot exist on it’s own without a heavy hand. Ask the average Cuban if he is delighted with the new rice cookers that Raul and Fidel gratiously allowed them to buy. Dang, now if they only could get electricity….
Anyway, here is the simple truth about profit. If you are in business doing anything, it is essential that the business is profitable. If it can not be made profitable, it should be changed, re-structured, or closed down. And I mean it earns a profit above and beyond paying yourself a realistic wage for your work in the business. If your business only pays you a wage and that’s it, you do not have a real business, you have yourself a job at best and a hobby at worst. A real business makes profit. Equipment has to be replaced because it gets used up. If you are not provisioning for replacement of assets, you are “eating the equipment”. Facilities have to be upgraded and maintained. It is irresponsible to not make provision for the continuation of the business’s assets. That takes profits, retained earnings to be accumulated. That has about as much to do with greed as saving for retirement is “greedy”.
I hope you don’t think the purpose of business is to provide jobs. Providing jobs is a benefit of business to society, a by-product, not it’s purpose. It’s purpose is to generate profit for it’s owners, a return on the money invested.
Another way to look at profit is this; being in business is very difficult. It requires a great deal of effort, talent, and persistence to make it viable. It is risky, you could lose serious money. That risk is worth something. You could take zero risk by sticking your money in T-Bills, earn 3% or whatever the going rate is, and be completely safe. So assuming the risk of business requires that you require a premium above and beyond the safe rate of return. That risk premium is profit. You put your assets at risk, and need a better return to justify it, otherwise, what’s the point? Many beginning business people make the error of not charging enough. They price their services at a wage rate. They are thinking like an employee still.
The first rule of business is KNOW YOUR COSTS. You need a good accounting system right from the beginning to capture the activity that is going on in your business, and tell you in a timely fashion whether or not you are making profit, from where, and what needs to be addressed to fix it, if you are not.