A business is simply defined as any entity or association engaged in commercial, artistic, or administrative activities. Companies may be sole proprietorships, partnerships, or corporations organized for the benefit of the individuals or other entities involved. Businesses may be for profit organizations or nonprofit entities that work to meet a social cause or further a humanitarian goal. Business enterprises may be locally owned and operated, but more are being conducted by international or offshore firms.
The term “profit” can be very difficult to apply to a business, which is why many choose to use the term “income.” In applying this definition to a for profit business, some consider any revenues over and above expenses as profits. Income is considered the total amount of money a shareholder or owners have received over time. The dividends paid out by shareholders are typically treated as income as well because they are distributions received by the corporation. This includes stock dividends, property dividends, and quarterly profits. For profit nonprofits, the only revenue that can be considered is membership or fees paid.
A firm’s balance sheet is used to determine its net worth or value, which is an estimate of future profits based on current assets and liabilities. The difference between net worth minus profit is the current value of the firm. The difference between current assets and liabilities is called current revenue.
A firm must determine what proportion of its products and services, it will sell in order to generate profits. When determining how much to sell in each product category, it must take into consideration market needs and desires. For example, if the firm markets several kinds of media image and design, it must determine what proportion of its products and services it will concentrate on creating these items and how many of the items it will focus on selling through other outlets. By doing market research, firms can make better decisions about their mix of core products and services.
Another way that business owners can benefit from profit maximization is by knowing the present value of the firm’s assets and liabilities. Present value is the future value of an asset or liability at a certain point in time, less the present value of that same asset or liability. If a firm plans to reap only what it can do today for its services and products, it is not fully optimizing its profits. However, if the firm focuses on the future, it will maximize its profits by taking into account the present and future value of its portfolio of assets and liabilities.
Profit and loss allocations between stakeholders must be based on the priorities of each stakeholder. Allocation strategies should be developed based on the overall social responsibility of stakeholders in the business. Some of the most important aspects of the social responsibility of stakeholders include the health of employees, the quality of the firm’s products and services, the environment in which the business operates, and the society in which it operates. Business owners should also pay close attention to the impact of their decisions on their own and their partner’s families, friends, neighbors, co-workers, and so on. Managing business risk appropriately, can help ensure that businesses maximize profits and minimize their exposure to risk.