A layman may says that business is carried on only for profit. But a good businessman cannot afford to keep profits his sole objective. According to Urwick, “Earning of profits cannot be the objective of a business any more than eating is the objective of living.” A business unit is an economic entity in which various factors of production are used. Capital is one of the factors of production and the reward for investing capital is given in the form of profit. Therefore, a business should be run to maximize the reward of one factor of production only though it is true that existence of profit is necessary to induce people to invest money in business adventures.

A business enterprise which is not earning any profit will not be able to attract investors as nobody is willing to assume unnecessary risks. Therefore, profitability to some extent is a necessary condition of the survival of an enterprise. According to Peter Drucker, “Profit is not an objective but it is a requirement that has to be objectively determined in respect of the individual business, its strategy, its needs and its risks.”

Profit serves as the basis of the following important economic and social functions:

(i)    Measurement of Effectiveness. It measures the effectiveness of the efforts of a business enterprise. Profit is an import test of its success in normal times.

The existence of reasonable profits shows that the business enterprise is efficient and the services ordered by it are appreciated by the society.

(ii)    Coverage of Risk. Profit is the ‘risk premium’ covering the cost of staying in business replacement, obsolescence, market risk and uncertainty.

(iii)    Survival and Growth. Profit ensures the supply of capital for innovation and expansion either out of retained earnings or through providing sufficient inducement for new capital. In other words, profit is needed for the survival and growth of the business enterprise.

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