Profit serves 3 purposes:

1. It measures the net effectiveness & soundness of a business’s efforts.

2. It is the “risk premium” that covers the cost of staying in business — replacement, obsolescence, market risk & uncertainty. Seen from this point of view, there is no such thing as “profit” ; there are only “costs of being in business” & “costs of staying in business.” And the task of business is to provide adequately for these “costs of staying” in business by earning an adequate profit.

3. Profit ensures the supply of future capital for innovation & expansion, either directly, by providing the means of self-financing out of retained earnings, or indirectly, through providing sufficient inducement for new outside capital in the form in which it is best suited to the enterprise’s objectives.

The proper question for any management is not: “What is the maximum profit this business can yield?” It is: “What is the minimum profitability needed to cover the future risks of the business?”

What about a profit objective? There should not be one. Profit should not be seen as an objective but as a requirement of a business, that is, not as a goal but as a need. Profit is the result of doing things right rather than the purpose of business activity. It is, above all, determined by what is necessary to attain company objectives.