On World Entrepreneurs Day, Simon Hulme and Chris Drew explore the concept of 'profit' and its role within enterprises.Many young entrepreneurs talk to us about creating ‘not-for-profit’ enterprises. This is, of course, a wonderful and noble goal … UNLESS, that is, it is motivated by the misguided thought that ‘profit’ is somehow a dirty word. It is important to challenge this type of thinking as without ‘profit’ nothing much is likely to be achieved, regardless of the social, or other, objectives of the enterprise. We would argue strongly that ‘profit’ should, in fact, be regarded as a mostly positive concept – particularly if your goal is to somehow change the world for the better.
Let’s pause for a minute to consider what is ‘profit’? It is the result of an enterprise adding value by virtue of its operational processes. Assuming that it is operating in a free market environment, this means that it is taking something and making it more valuable by means of human ingenuity, creativity, skill, know-how and endeavour. Perhaps one of the greatest examples of this is taking a bit of sand and adding quite a lot of human expertise to create one of the greatest products of all time … the silicon chip. Now that’s real added value, unlocking unbounded profitability for both the creators and the users of the product – not to mention the huge array of industries that owe their very existence to this extraordinary product!
Profit is also needed in order to generate capital to replenish worn-out assets and to create new products or services. We all quite like the idea of a profitable airline, which can regularly buy new aircraft, rather than one struggling to fund the cost of servicing an ancient fleet of planes! If we do not continually invest in our business or organisation, it is likely that, ultimately, others who do invest will take any market share we may have. Profit helps secure our future and new employment opportunities. A profitable business is also going to find it can raise new funding – whether debt or equity – more easily. A business losing money, or not making any, is not an attractive proposition unless it is simultaneously scaling rapidly (and therefore promising the likelihood of future profitability).
So if we were all to agree that ‘profit’ – or added value – is ‘good’ in itself, perhaps, when we refer to a ‘not-for-profit’ enterprise, we are simply saying we will only make the minimum profit needed to survive, and will retain it all in the organisation rather than pay it out to ‘greedy shareholders’?
Once again, this thinking is extremely flawed. Even before shareholders have a piece of the action (and we will get to them in a minute), a company’s profits are subject to corporate taxation. The UK government received £55.1bn of this tax in 2018/19, a key component of funding public services such as the NHS. In fact, in the same year, the UK spent £115bn on the NHS, so corporation tax revenues only covered just under half of this requirement. Given that we also need to fund education, defence, welfare etc, we could do with a lot more corporation tax, which ultimately, can only come from companies generating guess what … more profit!
After corporation tax, and the retention of any capital within the business, profits are paid to shareholders by way of dividends. In the case of large corporations, these dividends are a vital source of income for pension funds and prudent savers – and is what our parents or grandparents may be living off in their retirement. Dividends are also a reward to shareholders who have taken a risk. Without this potential reward, there would not be the capital available in the first place to build an enterprise.
Finally, let’s reflect on which companies have changed the world the most in the last couple decades – Amazon, Google, Facebook, Apple, Microsoft, etc. All are ‘for profit’ enterprises and have transformed our lives, predominantly for the better. Without the profit motivation they would simply not be there for us to use.