WHAT DO YOU BELIEVE THE TERM “PROFIT” MEANS.

Kaikoura Star, Volume XLV, Issue 75, 15 September 1925, Page 4

WHAT DO YOU BELIEVE THE TERM “PROFIT” MEANS.

It has been my misfortune to meet often with those who weep at the creditors’ meeting, or at the directors’ meeting that preceded it, and at such times it has been painfully apparent that the failure was unnecessary —there should have been a successful business, but, alas! there was weeping and wailing and gnashings of several things, and the reason was most usually that sonic one hail been deluding himself. One reason is the uncertainty of the meanings of several simple things that must needs be understood by anyone in order that the foundation of a successful business may be laid—just a very costly application of the old problem of knowing just what certain words mean, and it is here stated without fear of successful contradiction, that there are not 25 per cent, of all persons, who are engaged in business that know what the word ‘ 4 profit ’ ’ means. What is “Profit” ?

The dictionary says, 4 4 Profit is the gain resulting to the owner of capital from its employment in any undertak-

ing.” A 1919 very exhaustive work on accountancy says in full on this subject, 4 4 Profit consists of the difference between the selling price, and the amount the commodity cost.” These definitions are very clear, are they not? They arc not. From the above just two things are clear, first that the annual receipts over the annual expense is “profit,” and the price received over the full cost is 44 profit” on that particular article. When you try to square any of the above definitions with the term “profit” as used in everyday business you meet with so many exceptions that you are rather forced to the conclusion that no one knows what “profit” is. “Profit” as Applied in Modem Business.

A. —One man is convinced that if the invoice is £1 ami the market selling price |is £2 that he is making 100 per cent, profit. He reasons thus —£1 is the base, add 100 per cent, to it and you have £2. He thinks that, perhaps, cost of doing business will all iron out some way at the end of the year, but he sticks to his theory that he is making 100 per cent, on his purchase. If that same man should give a discount of 50 per cent, on that same article, he would have very convincing proof that his reasoning was wrong, as the 50 per cent, discount would be all the 100 per cent, profit, and by giving 50 per cent, discount is selling the article for what it actually cost, and paying for doing business out of his own pocket—it’s plain that he is deluding himself. B. —Mr B. is more canny, possibly he has tried the methods of Mr A. to his undoing, and he has learned to figure a little, so he says, 4 ‘This article cost me £1; it cost me 25 per cent, of my last year’s business to do business, that is overhead, 25 per cent, therefore he figures. First cost £l. Overhead, 25 per cent, of that £l, or 5/. Full cost £1 5/ — profit 15/, or 60 per cent.” It is also very plain that this merchant is deluding himself, too. C. —Mr C. is the type of successful man who really knows what he is doing. He remarks, “This invoice is £l. It cost me 25 per cent, to do business last year—the usual selling price of this article is £2. Twenty-five per cent, of that selling price is 10/, therefore my full cost is £1 10/, and my profit on this sale of £2 is 25 per cent of the selling price, or 10/ profit,” and it is here submitted that there is just one real commercial meaning to the word “profit,’’ and that is the meaning adapted by Mr C.

The definitions here given permit any one to base their figuring of profits on either the cost price or the selling price, but the careful man will adopt the safe method of figuring profits and discounts both from the selling price. To complicate the situation now comes the Press —this Press has 'unearthed a profiteer, and it says the article in question costs fid and is sold for 5/, with a profit of 1900 per cent. Which shows that the word 44 profit’’ has yet another meaning.

This English language of ours is no doubt confusing, but when any business man permits? himself to be confused as to the exact meaning of the word “profit,” it has been proved hundreds of times each year that such confusion is not only annoying, but is often very expensive. Therefore, it is patent that the seekers after exact knowledge can’t roly on the dictionary, or the Courts, or the latest work on accountancy, neither ean they safely adopt the meaning as given

in the daily press. There is only one safe definition of profit, and that single safe definition will apply just as well to the annual business as the single article, and that is—

PROFIT is the per cent, or sum fig ured from the selling price that repre sents clear gain over all costs and expenses.

To figure profits on the cost price is to lead to confusion between the daily sales and the annual report, and many times it is the first business mis-step which finally lands the concern in bankruptcy.

Know what you are doing when figur-

ing profits; it is not a wise plan to delude yourself on large per cents which will not prove out on the annual state ment. What is 100 per cent. Profit? It is strange that the business world does not realise that when it says “I am making 100 per cent, profit,” that it is really tolling you that the transaction was “all profit.” As directly applied to profit, this common expression could have no other meaning. Yet no one who uses the expression in such connection means this. What he means to say is that he has priced tli article at double the investment in that article. Perhaps you think that this reasoning is captious or fanciful. If it is it will aU figure out, ami figures won’t lie, though liars do figure. The cost is £1 ami the selling price is £2, therefore the profit is 50 per cent. The cost is 6d and the selling price is 5/. The profit is 90 per cent, on an actual business basis in place of 1000 per cent., as is often said. It is very simple arithmetic. The whole, or 100 per cent., is 5/. Of that 5/, 4/6 is profit, and 4/6 is 90 per cent, of the entire selling price, and should be considered—but almost invariably the business man reasons that the selling price is ten times as large as the cost, therefore, 1000 per cent, greater, consequently 1000 per cent profit. Strictly speaking there can not be 100 per cent, profit on any business proposition.