Grandpa, my school teacher says profit is a dirty word.
Business

Grandpa, my school teacher says profit is a dirty word.

Grandpa, my school teacher says profit is a dirty word. It’s fine?

It’s certainly not correct, but maybe it means that some profits are dirty because they are made by lying, cheating, and selling shoddy products. This happens, but the companies that do this don’t last long and the people who do it can be fined or jailed.

Most companies are better than this. A successful business generates income by selling things or providing services that people want. Consider a simple example like a restaurant. The food has to be good, the service excellent, the price not too expensive, and the business owner has to obey many health and safety laws. He or she has to pay vendors, pay staff, pay electricity and gas, pay municipal fees, pay taxes, and many other costs.

You have to bring in money from your clients and you have to pay all your costs. The money coming in has to be greater than the money going out. Otherwise, you will not be able to continue. The difference between revenue and cost is profit. Therefore, profit is far from being a dirty word. It is an essential sign that the business is running properly and will survive.

There are many other benefits that come from a company that makes a profit. Can you think what they are? First, the business owner will have the money to invest in the future: new equipment, better furniture, maybe even new or additional premises.

Second, you will be able to pay off money that you could have borrowed to start the business. He (or, of course, she) will be able to save some money or invest in pensions for him and her staff. The business person who makes a profit can donate to charity and many successful entrepreneurs do this.

From a business point of view, there is yet another reason to appreciate the value of earnings. Profits make a business more valuable, not only by putting money in the bank but, more importantly, by creating something that can make money in the future. The value of a company is not only its property and its money in the bank, it is the value of the profits that it can obtain in the future.

Suppose our restaurant owner starts out by buying a dilapidated property that has a bad reputation and has virtually no customers, thus making no profit. It’s such a mess that he was able to buy it for $50,000. Through hard work, good cooking, and good service, he is able to build a successful business that, five years later, is thriving, earning $100,000 a year. He probably reinvested part of his earnings every year to buy the best kitchen equipment and spent money on decorations and furniture, so his total investment could be an additional $200,000. The good news for him is that he can, if he wishes, sell the business for more than his total investment of $250,000. Why? Because the business has profits of $100,000, which gives additional value to the business. Such a business could easily be worth $750,000 or more.

This is the wonder of profit. The business owner is happy, the customers are happy, jobs have been created, taxes have been paid, the local area has a fancy restaurant, everyone has benefited and no one has been hurt. This is the magic of business that I will tell you much more about in the next articles.

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