Every business operates with an aim of earning profit. It is a reward for taking risk and investing time, money and energy in the business. Profit not only ensures the survival and growth of a business but also helps the concern to fund its social initiatives.

Importance/Role of Profit:

The importance/role of profit can be explained as follows:

i. Survival of Business:

‐  Profit is necessary for the survival and growth of a business enterprise.

‐  A new business may find it difficult to survive the initial stages in the constantly evolving markets.

‐  However, if the business makes even small profits, it can survive and aim for better profits in the near future.

‐  Profits also boost the morale of the employees, ease negotiations with banks, attract investors and build customer confidence.

ii. Reward for Risk Taking:

‐  Profit is a return on investment.

‐  A businessman invests his capital and also runs his business with an uncertainty of making profit and the risk of incurring losses.

‐  Thus, earning profit is a reward for risk taken in the business.

iii.  Availability of Funds:

‐  Regularity in profit making helps a business to create a pool of available funds in the form of savings or retained earnings.

‐  These funds can be utilized to meet future contingencies in business.

‐  Also, savings indicate a sound financial standing and thus help to build public confidence.

‐  This helps the business in raising funds by means of issuing shares to the public or taking loans from financial institutions.

Thus, profits make the availability of funds from internal as well as external sources possible.

iv. Research and Development:

‐  Reasonable amount of profit making encourages the management to undertake research and development.

‐  This may lead to the creation of innovative products and services that help the business to earn more profits.

v. Index of Performance:

‐  Profit acts as an indicator of financial performance.

‐  Higher profits indicate enhanced efficiency in the functioning of the business and lower profits signal the management towards taking corrective steps.

vi. Income to Satisfy Needs:

‐  Business is an economic activity i.e. its main purpose is to earn profit.

‐  Profit is the income earned by the businessman.

‐  Through this income earned, he can satisfy the needs and wants of his family.

vii. Growth and Expansion:

‐  Profits are required to fund the growth, expansion and diversification plans of a business.

‐  Growth and expansion may be in the form of opening new branches, offering different types of goods and services etc.

‐  Profits are also required to make a business globally competitive.

viii. Satisfaction of Interest Groups:

‐  A business depends on customers, employees, government investors, etc. for its functioning.

‐  These factors are known as interest groups.

‐  A profitable business is able to satisfy these interest groups by:

providing good quality products at a reasonable price to its customers;

offering fair remuneration to its employees;              paying taxes to the government and              distributing dividends on time to its investors.

ix. Increases Efficiency:

‐  Profits help in making payments to suppliers, employees and vendors on time.

‐  This ensures that the above associates are motivated to provide prompt and quality services to the business unit, whenever required. This in turn helps to improve the efficiency in functioning.