Business & Profits

and its Role in

Society

Background

A business (also called a company, enterprise or firm) is a legally recognized organization designed to provide goods and/or services to consumers. Business are predominant in capitalist economies. Most businesses are privately owned. A business is typically owned and formed to earn profit that will increase the wealth of its owners and grow the business itself. The owners and operators of a business have one main objectives i.e receipt or generation of a financial return in exchange of work and acceptance of risk. Notable exceptions include cooperative enterprises. Businesses can also be formed not-for-profit or be state owned.

Different Measures of

Profit in a firm

Gross Profit = Sales Revenue (Less) Cost of Goods Sold (COGS),thus removing only the part of expenses that can be traced directly to the production of the goods. Gross profit still includes general (overhead) expenses like R&D,S&M,G&A, also interest expenses ,taxes and extraordinary items.

Operating Profit = Gross Profit (less) all operating expenses. This is the surplus generated by operations. It is also known as Earnings Before Interest and Taxes EBIT , Operating Profit Before Interest and Taxes OPBIT or simply Profit Before Interest and Taxes PBIT

Different Measures of

Profit in a firm

Net Profit = Profit After Tax (unless some distinction about the treatment of extraordinary expenses is made).In the US the Term Net Income is commonly used. Income Before Extraordinary Expenses represents the same but before adjusting for extraordinary items.

Net income (less) dividends becomes retained earnings.

There are several additional important profit measures, notably EBITDA and NOPAT.

To accountants, economic profit or EP , is a single-period metric to determine the value created by a company in one period usually a year.

Different Measures of Profit in a firm

(Net) Profit Before Tax PBT equals operating profit less

interest expenses (but before taxes).It is also know as

Earnings Before Interest EBT, Net operating income before

taxes or simply Pretax Income.

Some economists define further types of profit:

• Abnormal profit (or supernormal profit)

• Subnormal profit

• Monopoly profit (super profit)

Optimum Profit: This is the “right amount” of profit a

business can achieve. In business, this figure takes account

of marketing strategy ,market position, and other methods

of increasing returns above the competitive rate.

Shareholder & Stakeholder view of

Profit

Shareholder Stakeholder

1.Narrow Focus, driven by numbers

and things that have been qualified and

measured

Sustainable, competitive thinking that

tends to be visionary

2.Executive Management may react to

valuations in dramatic ways (merger,

layoffs, etc.)

Multi-view of the organization

regardless if it is quantifiable.

3.Performance evaluation tends to be

financially focused with little

emphasis on intangible drivers of

performance.

Performance evaluation follow

strategic issues, not just operations.

4.Sources of value tend to be isolated

systems, fragmented and not coherent.

Strong value systems across the entire

value-chain, extending to external

stakeholder.

5.Slow to respond to change; new

ideas are not easily understood.

Easy flow of new ideas and innovation

(very change oriented)

6.Management tends to quickly

embrace a quick fix solution,

sometimes adopting the latest fad

despite the fact that it may not fit or it

is not well-tested.

Management does not embrace quick

fix solutions; instead opting to avoid

paying a heavy price.

Organization Approach towards…..

Shareholder Stakeholder

7.People who create value may be

viewed as “too radical” and somewhat

out-of-step.

People who create value are most

likely to advance within the

organization.

8.The bottom line focus is earnings. The bottom line focus is on value –

what value are we adding.

9.Traditional Approaches to growth –

allocate resources to marketing

,acquire other companies ,control

costs, etc.

Growth through the intangibles –

relationships, competitiveness

,knowledge workers; thinking in terms

of opportunities for growing the

business around core competencies.

10.Business success is what we create

for our shareholders.

Business success is what we create for

all stakeholders, not just shareholders.

A shareholder is the part-owner of the enterprise or company and such

he is interested in maximizing his profits. On the other hand the

stakeholders are the one’s who have a stake in the company and they

are the following.

1. Shareholders

2. Long Term Lenders

3. Employees

4. Distributors

5. Customers

6. Regulatory

7. Government

All the stakeholders have different expectations from their company or

enterprise. The shareholder’s want to maximize profits and their

dividend where as the long term lenders want to ensure safety of their

money and timely payment of interest. On the other hand, the customer

wants a competitive price and good quality and the distributor wants

timely payment. Regulatory authorities want to ensure that the

enterprise is running as per the laws of the land and the government

wants to see that they get revenue from the business houses.

Role of business

The basic objectives of businesses is to develop, produce and

supply goods and services to customers. This has to be done

in such a way as to allow companies to make a profit, which

in turn demands far more than just skills in companies’ own

fields and processes. Companies improve their resources by

developing material and ideas. The goods and services

produced must see demands made by customer.

For example, Maggie Noodles of Nestle was a instant hit as it

has created time value for the modern working housewife as

she could make something to eat in 2 min time.

Businesses/Companies benefits

society by:

1. Supplying goods and services that customer cannot ,or do not want to ,produce themselves

2. Creating jobs for customers, suppliers, distributors and co-workers.

3. Entrepreneurs make money to support themselves and their families , pay taxes and use their wages to buy goods and services.

4. Continually developing new goods, services and processes.

5. Investing in new technologies and in the skills of employees.

6. Building up and spreading international standards, e.g for environmental practice.

7. Spreading “good practice” in different areas,such as the environment and workplace safe.

Profits Not An Ethical Word.

• In fact, considered from all angles, is it unethical, NOT to make profit. It is unethical, for a company ,to make losses. Because, a company, to make losses , misutilises scares national resources, can not pay back creditors ,does not make wealth for its shareholders, make huge liabilities, upsets the economy, promotes inefficiency and most importantly, can not ,at any cost discharge social responsibility, meets its welfare commitments and jeopardies the future of its employees. Such a loss-making company becomes a nuisance and a burden to the economy and has no right to exist in the market place. Moreover ,it has no right to force its employees into economic insecurity, which is highly unethical.

• No business, however great or strong or wealthy it may be at present, can exist on unethical means, or in total disregards to its social concern, for very long. Resorting to unethical behavior or disregarding social welfare is like calling for its own doom.

Triple Bottom line Concept for measuring

Organizational Success

• The Triple bottom line (abbr. TBL or 3BL) and also know as

“People,Planet,Profit”. Captures an expanded spectrum of values

and criteria for measuring organizational (and societal) success:

economic, ecological and social.

• The concept of TBL demands a company’s responsibility to be

stakeholders rather than shareholders. In this case

“stakeholders” refers to anyone who is influenced, either

directly or indirectly by the action of the firm. According to the

shareholder theory ,the business entity should be used as a

vehicle for coordinating stakeholder interests, instead of

maximizing shareholder (owner) profit.

People, Planet and Profit

“People” (Human capital) pertains to fair and beneficial business practices toward labor and the community and region in which a corporation conducts its business. A TBL company conceives a reciprocal social structure in which the well-being of corporate labor and other stakeholder interests are independent.

“Planet” (Natural capital) refers to sustainable environmental practices. A TBL company endeavors to benefit the natural order as much as possible or at the least do no harm and curtail environmental impact.

“Profit” is the economic value created by the organization after deducting the cost of all inputs, including the cost of the capital tied up. In the original concept, within a sustainability framework, the “profit” aspects needs to be seen as the real economic benefit enjoyed by the host society.

Questions

• Long Answer Questions :

Business is related to making profit, whereas Ethics deal

with right or wrong. Therefore business and ethics is not

related to each other. Discuss (Oct.10)

What do we mean by Business Ethics and what are the roles

and responsibilities of various stake holder in it? (Oct.10)

• Short Note : What is Triple Bottom Line – Explain the

term. (March 11)