By Harshvardhan, the Subject Matter Expert at Edumarz
Solution: The role of Profit cannot be underestimated in a Business. Profit is the objective of every business activity. Behind every business decision, there is a thought of earning a profit on the capital employed by the Business.
Profitability of any Business refers to the profit in relation to the Capital Employed.
Every Business must earn a reasonable and sufficient profit for the Following Reasons:
- Survival– The survival of the business is directly dependent on the Profit of the business. If the Revenue generated is not sufficient to cover the cost, then the business is said to be at loss and if the business continuously is making a loss, then it will eat up the capital of the Businessman. The result will be the Closure of a Business Unit and the Loss of Capital employed.
- Growth– The growth of the business is also dependent on the Profit generated. If the Business has enough revenue to cover the cost of its operations every period then it can grow and diversify its business operations to gain more profit. The essence is That Earning Profit will lead to More Profits.