One of the myths believed in by large sections of our community is that making a profit is wicked and that a large profit is somehow more reprehensible than a small one.
The private sector has failed badly in explaining that "profit" is not a dirty word. (Unlike "loss", it is not even a four-letter word.)
While the main aim of a business may be to bring a particular product or service to the market place no enterprise would ever get off the ground unless the entrepreneurs concerned foresaw a real prospect of making a reasonable return on their investment.
Profits are necessary in order to attract both capital and labour. They are essential to enable the payment of interest, dividends and rent as well as wages.
Profits assist existing enterprises to expand. Profits help governments to raise taxes. Profits foster the development of new products and improvements to the quality of existing products, thus assisting consumers and creating job opportunities. Profits encourage competition.
RISK AND REWARD
Risk taking deserves its own reward. It is thus essential not only that businesses should make profits, but also that those profits should involve appropriately higher rates of return than, say, Commonwealth Bonds.
Workers need to be educated about these rather elementary facts of life. Companies could help this process by reporting profit results not merely as "after interest, depreciation and tax" but also as "after wages".
Unfortunately, headlines detailing company profits as being so many millions of dollars without also expressing them as a percentage of the funds employed frequently give quite misleading impressions.
A company which announces a large proportionate increase on a previous year's results may fail to stress that the latter base might have been abnormally low or that considerable amounts of additional capital contributed by shareholders might have been the cause of the improved performance.
It is understandable that many employees reading that their employers' profits have doubled might feel that their wages should also have been doubled. It is thus desirable that appropriate explanations are highlighted in profit announcements. The differences between profits - which can go down as well as up - and wages - which are virtually guaranteed - need to be stressed.
PROPER BOOKKEEPING NEEDED
This whole problem is made worse by the business community's failure to adopt inflation accounting. Many published profit results are quite illusory in that they involve an assumption that all dollars are equal.
However, a true profit does not arise unless a business enterprise has more real assets at the end of an accounting period than it had at the beginning (apart from monies paid to or by the proprietors).
Unfortunately, conventional bookkeeping frequently disguises the fact that businesses are actually going backwards while still paying tax on non-existent profits and while paying dividends out of capital. The suppliers of shareholders' funds need as much protection against the ravages of inflation as the suppliers of labour.
BENEFITS TO THE COMMUNITY
Critics of large company profits should also remember that because of the taxation system the community is virtually a 30 per cent shareholder in each company without buying a single share.
Indirectly, the community also benefits through the personal income taxes paid by investors on dividend and interest payments, through payroll tax, and through numerous other State and Federal taxes resulting from the business activity.
Apart from that, in Australia profits do not flow only to a small number of wealthy individuals - rather are they spread widely throughout the country by virtue of shares held by life insurance companies, superannuation schemes, unit trusts and even some trade union funds.
One way of increasing public awareness in regard to how our system works would be to encourage more ordinary citizens to become direct shareholders in Australia's public companies. Greater knowledge would also have valuable side-effects, such as reduced industrial disputation.
Profits encourage investment and this leads to a bigger cake for the whole community. This is surely more worthwhile than just keeping the cake the same size and merely cutting it up in different slices.
© N E Renton 2006
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