Every business operates with an aim to earn more than what has been invested and profit is the excess of revenue over cost. Profit plays an important role in business.
1. Sources of Income: Investors invest their money in the business with the sole purpose of earning profit, since profit is a source of income, it is therefore provides the owners of business the mean with which they and their family members can live a comfortable life.
2. Continuity of Business: The incentive of earning profit keeps the man engaged in business activities. A business can only grow and gain strength if it earns profit. So earning of profit is necessary for the continuity of business.
3. Efficient working: Profit is required for efficient and smooth functioning of the business. It is considered as a barometer for judging the performance of the business.
4. Goodwill : Profit helps in building the reputation
or goodwill of the business firms. With profit increasing over time, a business enterprise gains reputation. Such goodwill creates market standing which ultimately helps to raise loans and thereby obtain credit more easily.
5. Reward for risk bearing : Risk is always associated with any business. A person who invests money in the business has to bear the risk also. In the eventuality of loss due to any risk, the businessman doesn’t stop the business. It is the profit element that motivates him to carry on with business even in the case of losses.
6. Social responsibility : Higher profits make better remuneration and amenities possible. It increases the standard of living of workers. A firm with a higher profit is in a position to carry out its social responsibility towards various groups.
