Profit Is Good - With Real Numbers

[SentWest]

There's a lot of sentiment floating around that "profit" is a bad thing. I believe this results from a misunderstanding of what profit actually is. Basically, it's any money left over after the bills are paid. For a business, profit is their expendable income, the only thing they can use (besides grants and loans) to do anything above and beyond their current operation.

I work in commercial insurance, and our policies cover lost net income when a business is damaged by a covered loss, so I'm calculating it all the time. The following numbers are actual, everything else is made up for privacy.

We'll pretend this is a Moroccan restaurant in North Dakota.

2010 Gross Sales: $1,297,719.73

Woo hoo! We're fat cats now! Actually, not really.

The restaurant purchases food to prepare and serve, and liquor as well. The cost of goods sold in this case is ($453,309.61).
So that's just the cost of the stuff they buy to make into stuff to sell.

Payroll is ($388,928.18) with a 12.39% payroll tax included. This is the labor to take the stuff they buy and make it into stuff to sell.

Now we come to controllable expenses. These are all the other things a business spends money on to stay in business. They include (in this case) advertising, health insurance, repairs and maintenance, utilities, insurance for the building, mortgage payments and telephones.

Controllable expenses come to ($395,930.16).

That leaves a net profit for 2010 of $59,551.78

That's a lot? Not really. That is the money to pay for everything else not required to run the business as it is, right this minute. Lets say they want to hire the chef an assistant, as they're quite busy. The average earnings for a cooking assistant is $25,000 per year (from a culinary school site). Plus and additional 12.39% in payroll tax gives ($28,097.50).

Now we're down to $31,454.28 in net. So they've got enough left to maybe get a nice pole sign, which run about $20k, and maybe redo some of the kitchen equipment if it's old.

So by looking at 2010, if (big IF) sales remain stable in 2011, the business can afford in 2011 to hire one or two more people, or maybe do some remodeling and give their long term employees a raise.

That money is not going in a vault in someone's mansion, it's going to get turned back into the business so that they can improve sales or continue going or retain employees.

In huge businesses, any net profit not slated for use is going to be invested (which is what happens with a large portion of premiums collected by insurance companies. Those investments are where banks get the money to loan to someone like me to buy a house, or start a small business.



The point is, you can argue that you don't like what some companies DO with their net profits. But profit in general is not bad, and is vitally necessary for businesses to remain in business, which in turn is vitally necessary to have an economy not based on trading sea shells.

 

[disciple2011]

Profit of 50k a year is not anything like like profit of 500 million a year.

So each case must be looked individually.

 

[chaz345]

Profit of 50k a year is not anything like like profit of 500 million a year.

So each case must be looked individually.

Right, except that most of those in the category of "rich" are a lot closer to the 50k per year profit than they are the 500 million. And the large majority of jobs in this country are for companies in the former category, not the latter.

 

[Verticordious]

Businesses only make money when people choose to but their product. Microsoft didn't get rich by hiring a private army and forcing people to buy Windows, they got rich by creating a product that people wanted to buy. People who accuse corporations of being greedy just because they make a lot of money are just as petty as people who accuse me of being on steroids just because I'm bigger and stronger than they are. Some people have more money than others because they contribute more to the economy. Spend less time coveting what your neighbor has, and more time gaining knowledge and work experience, and you might actually contribute something to the economy and be compensated for it.

 

[SentWest]

Profit of 50k a year is not anything like like profit of 500 million a year.

If you're making a profit of 500 million, you likely have thousands of employees, which means a raise for everyone can be quite pricey. Or building a new building, which can easily shave off a hundred million. Or purchasing a struggling company as a whole, as you'd need to be prepared to pay all the aquired employees' wages as well.

The company I work for has a profit sharing program. We all, every one of us, get a fat bonus from that net profit if we have a good year.

So each case must be looked individually.

I agree.

So people need to stop with the "profit is bad," "corporations are evil" nonsense.

 

[kermit]

There's a lot of sentiment floating around that "profit" is a bad thing.

Who is saying this?

That money is not going in a vault in someone's mansion, it's going to get turned back into the business so that they can improve sales or continue going or retain employees.

This is not true. Profit is the money left over after all expenses are paid, including reinvestment. If it's profit then it's not turned back into the business, it's money that is cashed out.

 

[Wayte]

Profit is fine. Maximizing profit at any cost, especially when that cost trickles down better than any amount of wealth, that's where the problem comes in.

 

[disciple2011]

So people need to stop with the "profit is bad," "corporations are evil" nonsense.

I agree.

But for those with an axe to grind like broad sweeping generalisations.

Makes the story grander.

I will warrant that if Ben & Jerry's showed up with free ice cream both Occupy Wall Street and Tea Party People would line up for it.

See some corporations are not evil.

Unless you have diabetes. Then B&J is the devil.

 

[disciple2011]

Profit is fine. Maximizing profit at any cost, especially when that cost trickles down better than any amount of wealth, that's where the problem comes in.

ANYTHING gotten at any cost is a downhill slide into infamy.

There are three phrases I look out for when people make speeches that clue me into their evil:

At any cost
The end justifys the means
For the greater good

When you hear that resist them. For they will eat you alive. They are the destroyers.

 

[Drekkan85]

I think the problem is that the rules and standards we have surrounding corporations from a profit-generation point of view are actually fairly necessary to keep the judiciary from being overburdened by a massive wave of time-consuming and expensive litigation.

What do I mean? Recall that investors, as the ones holding the right to the residual profits of a corporation, have a basic right to have their interests protected. That's the fundamental basis behind the basic rule in Dodge v Ford Motor company - the usual lay explanation is that corporations are required to maximize shareholder gain (which is done by maximizing profit).

Of course this is something of an oversimplification. If you actually get into the case you can find that one reason that Ford stopped paying out special dividends and thus maximizing shareholder gain is that he learned the Dodge brothers were saving their dividend payments to open a competing plant. Also leave aside that he went against his lawyers advice and framed it as a "I want to pay my workers more because it's the right thing to do" as opposed to "By paying workers more and investing in new factories I'm maximizing long-term shareholder value and gain by attracting better employees and having better facilities that can earn a better margin".

But the basic lesson courts have drawn is the above-stated shareholder value maximization. The question then is why is this a good thing. As I somewhat alluded to above, without this rule the situation becomes far too nebulous. Take the situation below:

Jim has a factory and wants to expand and runs an open tender. Bob offers to do the job for $8 million. Ted offers to do it for $10 million. Jim selects Ted over Bob. The shareholders, having been screwed over, sue. They contend that Jim and Ted's fathers are old army buddy's and they found out that Ted's business hasn't been doing as well - and that this is just a scheme for old war buddies to help one another out. Jim rejects that and claims that Ted's firm builds "safer" or "greener" equipment, or pays his workers better, or whatever noble sounding goal you want.

Instead of being a relatively simple exercise for the court system, it devolves into a massive legal squabble that, given motions and counter motions, will likely take years. Businesses will get paralyzed, the legal system will get even more bogged down, and innocent shareholders get screwed.

 

[chaz345]

This is not true. Profit is the money left over after all expenses are paid, including reinvestment. If it's profit then it's not turned back into the business, it's money that is cashed out.

I believe you are missing the distinction between gross profit which is what's left over after paying all non-discretionary expenses and net profit which is what's left over after reinvestment.

 

[kermit]

I believe you are missing the distinction between gross profit which is what's left over after paying all non-discretionary expenses and net profit which is what's left over after reinvestment.

Gross profit (or EBITDA) includes reinvestment costs. Net profit is after all expenses are paid including taxes and interest (or to complete the rest of the acronym, depreciation and amitorization).

 

[chaz345]

Gross profit (or EBITDA) includes reinvestment costs. Net profit is after all expenses are paid including taxes and interest (or to complete the rest of the acronym, depreciation and amitorization).

It would appear that there are differing interpretations and different accounting practices regarding that term. I saw some uses of it that included nothing other than cost of goods sold and others that included a lot more.

 

[acropolis]

So people need to stop with the "profit is bad," "corporations are evil" nonsense.

There's a whole lot more to corporations being evil than just 'profits are bad.' When employees are losing benefits, getting laid off, not given safe work environments, etc. while the CEO is still getting millions a year there is something wrong. All lives and livelihoods matter and are worth defending, not just the richest among us.

edit: Also just because something is economically beneficial doesn't mean it's ethical.

 

[childofGod1]

This is very, very simple. Profit is the reason someone, ANYONE, opens a business. Take away profit, and you have no economy. That's true of every business transaction from selling your neighbor a few eggs to a multinational corporation selling a hundred million tons of goods to Walmart. If I can't get something (even if it's nothing more than storage space) for my effort, I won't even bother to have a rummage sale. How many of you would like to live in a nation where nobody wants to produce anything?

 

[childofGod1]

There's a whole lot more to corporations being evil than just 'profits are bad.' When employees are losing benefits, getting laid off, not given safe work environments, etc. while the CEO is still getting millions a year there is something wrong. All lives and livelihoods matter and are worth defending, not just the richest among us.

edit: Also just because something is economically beneficial doesn't mean it's ethical.

Have you noticed that businesses are cutting costs bacause the economy stinks and they're not making profits? That includes cutting benefits, wages, and corners. There is something wrong - very, very wrong, and it's not "evil corporations". "It's the economy,------!", to quote a famous presidential campaign. If the current administration continues raising taxes, companies will continue to lay off "the little guy" in an attempt to keep their doors open. If they shut down, all the little guys lose their jobs, including the jobs that don't offer benefits.

You can rail against the unfairness of it all til you turn blue, but it won't change the facts. Without employers, there are no employees. If you kill the golden goose, you have nothing but a pile of bloody guts and feathers in the morning.

 

[acropolis]

This is very, very simple. Profit is the reason someone, ANYONE, opens a business. Take away profit, and you have no economy. That's true of every business transaction from selling your neighbor a few eggs to a multinational corporation selling a hundred million tons of goods to Walmart. If I can't get something (even if it's nothing more than storage space) for my effort, I won't even bother to have a rummage sale. How many of you would like to live in a nation where nobody wants to produce anything?

Fortunately there's virtually no one in the US who wants to remove profit altogether. It's not just a choice of ALL PROFITS and NO PROFITS. It's hard to even discuss this type of thing, though, when so many people think that having a 50% marginal tax rate (as it was under Reagan), instead of a 35% marginal income tax rate is COMMUNISM. Just because at the extreme end of the pay scale people receive a smaller portion of profits, while still banking millions of dollars yearly, doesn't mean that they have no incentive to work. Millions of dollars is still a lot. How many people do you think would turn down $5,000,000 just because they in theory make $7,000,000? There is no sane person alive who would prefer to make due with a meager salary when they could be making millions simply because they are making as many millions as they could be. Particularly when those missing millions add up to billions of dollars which can be used to provide support for people who need it, thereby making healthier, happier, more productive workers to keep those truncated millions rolling in to the business. Plus unfortunate things tend to happen to the wealthy few when enough workers aren't happy.

Have you noticed that businesses are cutting costs bacause the economy stinks and they're not making profits? That includes cutting benefits, wages, and corners. There is something wrong - very, very wrong, and it's not "evil corporations". "It's the economy,------!", to quote a famous presidential campaign. If the current administration continues raising taxes, companies will continue to lay off "the little guy" in an attempt to keep their doors open. If they shut down, all the little guys lose their jobs, including the jobs that don't offer benefits.

You can rail against the unfairness of it all til you turn blue, but it won't change the facts. Without employers, there are no employees. If you kill the golden goose, you have nothing but a pile of bloody guts and feathers in the morning.

The wealthy are doing very well for themselves and companies are currently holding on to record-breaking stockpiles of money, yet they do not hire folks. It's not taxes, it's an aggregate lack of demand. Wealthy people can afford to just sit on their money and wait for the economy to improve, so they don't need to create jobs to stay comfortable. If there isn't enough demand from consumers due to lack of money and jobs, then there's no reason to start a business. BUT if you instead money and jobs to those at the very bottom of the pile, suddenly there is greater consumer demand and investors have reasons to start businesses and expand existing ones. It's a dangerous oversimplification to think that just dumping money on those who already have it is going to solve everything, when it obviously doesn't, given that the wealthy in the US are wealthier than they ever have been, yet there is still terrible unemployment.

 

[Viren]

Have you noticed that businesses are cutting costs bacause the economy stinks and they're not making profits? That includes cutting benefits, wages, and corners. There is something wrong - very, very wrong, and it's not "evil corporations". "It's the economy,------!", to quote a famous presidential campaign. If the current administration continues raising taxes, companies will continue to lay off "the little guy" in an attempt to keep their doors open. If they shut down, all the little guys lose their jobs, including the jobs that don't offer benefits.

You can rail against the unfairness of it all til you turn blue, but it won't change the facts. Without employers, there are no employees. If you kill the golden goose, you have nothing but a pile of bloody guts and feathers in the morning.

When the consumers are hurting the the employers get hurt. The problem with the economy is a lack of demand, because people are out of work, earning less and they can't buy all the goods the corporations are producing. The goose is fatter than ever, but there's a glut of eggs(products) on the market.

 

[childofGod1]

Fortunately there's virtually no one in the US who wants to remove profit altogether. It's not just a choice of ALL PROFITS and NO PROFITS. It's hard to even discuss this type of thing, though, when so many people think that having a 50% marginal tax rate (as it was under Reagan), instead of a 35% marginal income tax rate is COMMUNISM. Just because at the extreme end of the pay scale people receive a smaller portion of profits, while still banking millions of dollars yearly, doesn't mean that they have no incentive to work. Millions of dollars is still a lot. How many people do you think would turn down $5,000,000 just because they in theory make $7,000,000? There is no sane person alive who would prefer to make due with a meager salary when they could be making millions simply because they are making as many millions as they could be. Particularly when those missing millions add up to billions of dollars which can be used to provide support for people who need it, thereby making healthier, happier, more productive workers to keep those truncated millions rolling in to the business. Plus unfortunate things tend to happen to the wealthy few when enough workers aren't happy.



The wealthy are doing very well for themselves and companies are currently holding on to record-breaking stockpiles of money, yet they do not hire folks. It's not taxes, it's an aggregate lack of demand. Wealthy people can afford to just sit on their money and wait for the economy to improve, so they don't need to create jobs to stay comfortable. If there isn't enough demand from consumers due to lack of money and jobs, then there's no reason to start a business. BUT if you instead money and jobs to those at the very bottom of the pile, suddenly there is greater consumer demand and investors have reasons to start businesses and expand existing ones. It's a dangerous oversimplification to think that just dumping money on those who already have it is going to solve everything, when it obviously doesn't, given that the wealthy in the US are wealthier than they ever have been, yet there is still terrible unemployment.

There is a point where decreasing profits and increasing risk have the same effect as no profits, when business owners say "Why bother?"

With Obama's constant "raise taxes on the evil rich" speeches, it's quite logical for companies to hold onto what they have. They have no certainty, no assurance that if they invest (risk) that money, they'll even be able to break even, much less see a profit. There will be no hiring, no recovery until investors and CEOs can reasonably expect to see something from their efforts.

Consumer demand is contingent upon those consumers having a steady income. The same uncertainty that now grips the corporate world is creating a paralysis among consumers - those who still have jobs. The unemployed don't have an income to spend.

There isn't a glut of products, there's a shortage of confidence. Right now, I need a new leaf blower very badly, (bad back, can't rake) but I won't buy one until I'm certain that I will be able to buy groceries. As long as I don't have a steady income, I won't spend anything that isn't absolutely necessary. I want to buy things, but I can't. I have talked to many local business owners. They're in the same situation. They don't have a reasonable expectation that they can make enough to cover expenses, especially taxes and energy costs, and therefore won't spend the money to hire anyone. They're cutting costs wherever they can. These are my neighbors, small business owners who are losing their homes and doing without just like the rest of the nation.

A permanent, or at least long term, tax cut along with policies that would keep the price of energy from "necessarily skyrocketing" would give employers enough confidence to hire a few people and start the ball rolling.

Or we can do it your way and take what little they're making and discourage further economic growth as small employers throw up their hands, take their profits and retire to Mexico. The big corporations will simply continue to move operations offshore in search of a more genial economic climate like China (where they don't care about workers, the environment or ethics very much).

 

[acropolis]

Those who are in the highest income brackets aren't exactly shaking in their boots, since they pay lower taxes than most bus drivers (~17%), since most of their income comes from capital gains which is taxed at a paltry 15%. It's a better time to be rich now than it has in the last 80 years. What is lacking isn't personal profits for individuals, but consumer demand. There simply isn't any reason to invest when the economy is so anemic.

Those small business owners would be making much more money off sales if you did have money to buy the products you want, and if you did have a steady income. Statistically, those who most less income spend a higher percentage of their money earned. Those in the bottom third spend nearly everything they earn (often they spend more than they earn, in fact). If you give tax breaks to the bottom earners, or even just flat-out give them money, that money will be immediately used to purchase goods and services which will raise demand which will give those with lots of money a good reason to invest and create more jobs.