Of all the business objectives, profit is the one that gives you the greatest scope to stand out among your fellow candidates. People seem to think of profit as both simple and slightly uncomfortable. A-level students use phrases such as ‘make lots of money’ as substitutes for profit, yet this reveals a lack of appreciation of the complexity of the term. By the time you have read this article you should be in a position to give strong answers to exam questions on this topic.
A combination of simplistic AS questions and weakly written newspaper articles make it sound as if profit is a lump sum. AS questions make you calculate an answer such as: ‘profit = £1,400’. Newspapers make it sound as if profits are a chunk of millions that directors and shareholders take away and use to buy champagne and penthouse pads in Paris. In the latter case there are two issues: first, that profit sounds close to theft, and second, that it is a lump sum, a sort of cash pile for directors to plunder. It so happens that, in recent years, America and Europe’s bankers could be accused of treating their shareholders’ capital in exactly this way, but this is not typical of business as a whole. Generally, profit is a by-product of what a firm achieves, and is simply one potential source of the net cash flows that are the lifeblood of a business.
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