Profit Creation and Social Responsibility
A business is defined in the Merriam Webster’s Collegiate Dictionary Tenth Addition as a commercial institution or activity for profit. A business is described as any type of enterprise undertaken to meet commercial objectives. In its most basic terms, business activity refers to the acquisition of new resources or goods and the utilization of existing supplies in the process of enhancing profits. A business is generally characterized by a fixed number of fixed assets or liabilities and a definite amount of revenue or income.
Profits and losses are stated as a proportion of revenue minus the total expenses usually arising from operation of the firm. The difference between revenue and expenses, over and above the value of the assets and liabilities owed to creditors is termed as profit. A loss is the difference between revenue minus expense, less than the equity or value of the firm. A loss may be either a fixed or variable amount. A company’s net worth is the value, realized by the owner, less the liabilities owed to it and its equity.
There are two concepts that play a vital role in determining the nature and scope of profits in a business: the profit concept and the cost of capital. According to the profit concept, the firm’s income is derived primarily from sales of products and its production capacity. On the other hand, according to the cost of capital concept, profit and loss are viewed as the result of the efficiency and bad financial habits of the firm. The importance of a firm’s profit margin in its total revenue may be regarded as equivalent to the profit made by the operations of a large-scale industry. Other factors that affect profit margins include total debt and assets, credit ratings, and level of investment. The ability of a firm to undertake expansion projects and cope with new competition also determines its profitability.
Basically, business organizations engage in two kinds of activities- retailing and manufacturing. The retailing sector involves sales of goods and services to the end users, while the manufacturing sector primarily deals with the production of the firm’s commodities. Therefore, these two important sectors have major effects on the overall profitability of a firm. To help businessmen understand the meaning and magnitude of these key terms in profit maximization, the following discussion is being handed below.
For all practical purposes, a firm’s profitability can be defined as net profits divided among its stakeholders. Stakeholders, also known as customers, include the consumers, employees, suppliers, and government agencies. All these key points contribute to the profitability of a firm because they comprise the bulk of the target market. When profits of a firm are not maximized, the reason can be attributed to the under-utilization of productive resources by the firm. The three important key takeaways here are as follows:
Corporate social responsibility also plays an essential role in the calculation of profits. Firms must take the initiative to engage themselves in the communities where they sell products and services. Engaging in social responsibility makes good business sense. The three key points to consider here are as follows:
A company must assess its total costs over each of its revenue generation channels. These costs include direct operating expenses, indirect costs such as costs of maintaining plant, inventory, and finance, and service and maintenance expenses. After assessing the total costs, a firm must then calculate its gross margin. This number, together with the current market price of the firm’s product or service against the prices prevailing in the market, gives a firm a measure of economic value added (EV). The higher the economic value added, the better the firm’s performance compared to its competitors.
Good companies give their employees good salaries and benefits so that these people can have something to fall back upon if the business fails. The businesses also should have a system in place to ensure that its environmental policies are being followed. All these key factors discussed here – including social responsibility, financial accounting, market pricing, profit and loss analysis, and analysis of environmental impact – form the basis of how businesses decide where to focus their profits and how to increase them to create a better environment for everyone involved.
