Understanding the Balance Between Profit and Loss
A business is usually defined as any company or organized entity involved in commercial, agricultural, or financial activities. Businesses may be either for-profit or non-profitable organizations that conduct primarily to meet a social purpose or further an economic cause. The term “business” refers to any activity undertaken to derive profit. Today, the word “business” is commonly used in most fields of endeavor, but the original meaning of the term is “action of managing affairs”.
The profit motive of businesses may be considered as the driving force that drives a business owner to succeed. A businessman strives to earn profits in order to provide for his own personal necessities and to eventually make a profit so he and his family will have financial security. For-profit businesses are usually those businesses in which the principal purpose of the enterprise is making a profit through a sale of products or services to the general public. Non-profitable businesses fall under a different classification, but the overall aim of such enterprises remains to generate enough revenue from sales to make a reasonable return for the owners and also to prevent adverse environmental effects.
In contrast to for-profit and non-profitable businesses, profit-making businesses are those businesses that make a profit solely from the operation of the business itself without any outside costs. Profit-making businesses are normally controlled by one or more individual entrepreneurs. Some examples of profit-making businesses include franchises, partnerships, and sole proprietorships. Franchises are types of partnerships where multiple business owners share the profits produced by the franchise.
Sole proprietor businesses, on the other hand, are businesses where only one person owns and controls the entire business. This kind of business model is the most commonly found in the United States and a few other countries. Examples of sole proprietor businesses include sole proprietor brokerages, partnerships, and corporations. The main difference between sole proprietor businesses and corporations is that while corporations enjoy the protection of limited liability, sole proprietor businesses do not.
When it comes to profit and loss, a business owner’s mind should always be in the black. If a business makes too many losses, the owner may end up having to liquidate assets and recuperate debts. To avoid having to liquidate one’s assets and end up having to repay debts, a business owner must continually keep a record of all transactions involving his business. Business administration experts will advise their clients on how to keep records and maximize profits.
A successful businessman understands the balance between cost and income. This balancing act is also applicable to business activities in terms of profitability and loss-making. A businessman should never assume that he will incur a loss because his expenses are covered by insurance or the government. The assumption could be a costly mistake. In every business, there are certain amount of allowable expenses and it is the duty of the businessman to know the exact amount of allowable expense and control expenditures to the maximum allowed level. Control, rather than covering up costs, are the better way to assure profitability in the long run.