Profit Management

Nature of Profit
Profit is a residual sum.
Profit is the sum over and above the ordinary costs of

business including contractual outlays.

No body contracts to pay this residual sum.
Profits are contingent upon successful management of risk.
Business is faced with number of uncertainties.

Uncertainties in Business
Technical (physical process of production)
Cost uncertainties (change in the prices of Raw

materials, wages, rent etc.)

Demand (change in consumer preferences and

innovations)
Market (future price and volume of sales)

Profits vary
From Industry to industry,
Businessman to businessman,
By level of business activity.

Profit theories
1.

Profit is the reward for risk taking and uncertainty

bearing:
According to Prof.Knight risks are of two types:

.Insurable and
.Non insurable risks

 Insurable risks:
a) Risk of loss of property due natural disasters
b) Risks of dishonesty
. Non insurable risks:
. Competition
. Technical
. Business cycle
. Government action

2. Profit as a consequence of market imperfection and

Monopoly
. Profit is the result of contrived scarcity
. It can exist only in imperfect market
where o/p is restricted and consumers are deprived
of opportunities of alternative sources of supply

3. Profit as a reward for successful

Innovation(Schumpter)
. Innovation refers to any purposeful change in
production methods or consumer tastes
. Invention is the creation of something new whereas
. Innovation is the application of an invention to
business use.
Many inventions never become innovations.

The innovator is one who turns a new idea or

invention into a commercial proposition

Thus innovator reaps the profits of innovation
Then comes a period of adjustment when new

competitors come in and innovational profits die out.

Functions of profit
Provides incentive to produce what consumers want,

when and where they want it at the lowest feasible

cost.
Measure of performance
Premium to cover costs of staying in business
Ensures supply of future capital

Accounting profit and Economic profit