“We aren’t tempted by the profit motive, so we’re more attuned to truly serve the needs of our customers…”
“We don’t have the constant pressure of meeting a bottom line which often distracts us from really pursuing our mission…”
“I’m so glad our business isn’t all about the pursuit of profit…”
Ever heard something like this before?
The unfortunately prominent idea lying behind them is that profits are bad – they should be looked down upon and ashamed of. They’re either a necessary evil, or they should be abolished altogether.
I’ve noticed this thinking recently in arguments for working in the non-profit sector vs. the for-profit sector. Implicitly or explicitly the non-profit sector is made out to seem more obedient, more faithful, and a more holy alternative than work in the for-profit sector.
However, far from being a deterrent to fulfilling one’s mission, profits (and losses – for you can’t talk about one without the possibility of the other) are an indispensable mechanism that communicates in a uniquely powerful way, whether a business is in fact fulfilling their mission or not.
As I saw it recently, “No company ever went bankrupt making a profit.”
To abolish the accountability and guidance the profit/loss mechanism provides is to invite all kinds of destruction, disorder and confusion into our world. Therefore, we need a better understanding of how profits and losses function in businesses so as to avoid these dangerous misconceptions.
Understanding Where Profits Come From: The Production Process
One cannot understand the important function of profits or losses until one understands all that must happen before ever an ounce of profit or loss is accrued.
Profits are the result of entrepreneurial effort and enterprise, or just plain business if you prefer.
In the Christian worldview, the essence of business can be distilled down to a simple phrase:
“The effective stewardship of entrusted resources towards the effective service of others.”
In a free society characterized by free markets, the prevailing economic environment encourages and rewards effective stewardship and service. In order to thrive, we must all be about producing something that others value.
This is true no matter if you are employer or employee.
Employees freely offer their time, labor, skills, expertise and knowledge in exchange for income provided by entrepreneurs and business owners. Those same entrepreneurs willingly risk their own capital, resources, time, labor, reputation and a great deal else in order to provide a solution to a perceived need in the marketplace. This process of production with its many changing variables must be accounted for. In other words, the value of what a business spends on what it produces must be measured against the value of what it hopes to generate in the marketplace.
Part of stewardship is the careful administration and deployment of all entrusted capital resources that go into the production process. A company must wisely order and arrange its capital so as to best serve its customers in a sustainable way. If a company has managed its production process well enough to create a product or service they believe to be capable of effectively serving others, then it is ready to go to market in the hope of making a sale.
Sales – The exchange of value for value
In a free market economy, sales are historical evidence of voluntary exchanges of value between two or more parties. If both parties weren’t willing, no exchange or sale would occur. When a sale is made, it signals that someone somewhere values that product/service enough to willingly part with their own resources in order to obtain it. In other words, sales are proof that you as the company have met a perceived need in the marketplace. Completed sales are evidence of completed service.
Only at the point of sale does the revenue appear to cover the costs of production. Without sales there can be no profit – though there can be plenty of capital loss. Entrepreneurs bear the risk of operating at a loss until sufficient revenue is generated to cover all costs of production.
When we talk about profit, we are most often referring their accounting sense. In accounting, profits signal the amount of income received over and above the cost of goods sold. COGS (cost of goods sold) includes everything it takes for a business to get their goods or services produced and sold in the market.
If and when a business records an amount of revenue greater than the cost to produce and sell its goods over a given time period then it has made a profit for that time period. If it doesn’t, then it has made a loss.
Re-framing our Understanding: What Profits and Losses Really Mean
Putting all these pieces together, the fundamental purpose of profits and losses is to clearly reveal to a company how well it is accomplishing two things;
- Responsibly stewarding the resources entrusted to it
- Adequately and sustainably serving its customers needs
Boom! There you have it!
At the end of the day, profits and losses are all about measuring effective stewardship and service!
That’s what they communicate to a company all in a few small (or large) numbers.
Let’s explore further
Accounting for the cost of production lets a company know how much value it must generate to justify its current production structure and the deployment of its capital resources in service to others.
Profits and losses account for (or take into account literally) the management of these constantly changing variables over a given time period. For the company to responsibly steward its capital it must arrange it, deploy it, and invest it in such a way so that it generates greater output value than the combined value of all the inputs. In other words, it must arrange its capital to produce something that customers value more than the corresponding values employed in the cost of production.
Profits indicate a wise arrangement of capital resources towards the creation of something which is sufficiently and consistently valued by others. Losses indicate the opposite. Thus we see how vitally important profits and losses really are.
No Profit, No Loss
When one argues either for or against profits, that’s the same as arguing for or against the possibility of losses too. If profits are to be abolished, then how will we know if one is “losing money” as well?
Losses are equally as important to company leadership as profits are. When a company records losses over that same time period, it’s obvious to managers and owners and whomever else that the current capital structure is not generating value, but rather depleting it. Losses show that a company is not serving its customers needs in a sustainable way because the goods and services produced by the company are not valued sufficiently by the market to warrant that particular production structure.
Wouldn’t anyone involved in an honest business want to know if they are deploying their resources well? If they are sustainably serving their customers? Surely for anyone truly concerned about effective stewardship and service the answer must be yes! Therefore, the profit-loss measurement must be maintained and defended.
This should be true for both employee and employer as often the one cannot exist without the other.
Employees who oppose their employers careful attention to whether or not they are profitable, are opposing that which makes their own employment possible in the first place.
But what about those greedy capitalists?
What about them? Have you ever stopped to think whether or not one can even see or measure greed? Greed is a matter of the heart and only God sees the heart clearly. Making a profit shouldn’t be equated with greed, an unhealthy desire to be rich or make a bunch of money.
Even if a company’s stated mission was only ever “to make a profit,” in a free market system it cannot do so without first doing what we just described – sustainably stewarding resources towards the valuable service of others.
In other words, companies make seek profits first, but they never come first. They only come as a result of sustainably generating value for others–by doing well as faithful servants and stewards!
Isn’t that amazing?!?!
Stop and think about that for a moment.
God, in his infinite goodness and wisdom, has ordered a system that naturally and consistently directs people to the wise stewardship of the resources entrusted to them and to attentively meet and serve the needs of others.
Incredible!
Whether it be Gordan Gekko or Samuel Truett Cathy, for either of them to be who they are, both must become stewards and servants.
Whenever I think about this I can’t help but wonder and marvel at the goodness and wisdom of God.
When one truly understand this, the “invisible hand” metaphor of Smith starts to take shame into the very visible hands of the Lord Jesus Christ – who generously and graciously provides for his creation in a trillion different ways through a trillion trillion different voluntary exchanges every single day. What we might otherwise call today – markets.
You see, God didn’t just give us commands in a vacuum. He gave us a system through which to carry out those commands – that system is the free and unencumbered market.
It is as clear as day for those who have eyes to see – and what a glorious thing it is!
The Natural Order of Things
Revisiting not for profit vs. for profit, the natural order of things suggests that not-for-profit activity can only be possible because of profits having been previously generated at some point. Profits, hard earned by the effective stewardship of resources in the service of others, enable the possibility of charitable organizations and not for profit associations.
Don’t think so?
Just ask which came first – was it Microsoft? Or the Bill and Melinda Gates Foundation?
It was only because of the prior profitability of Microsoft that Bill Gates could create the Bill and Melinda Gates Foundation.
Dr. Anne Bradley puts it succinctly when she says,
“To be able to start such a large aid organization Bill Gates first had to be a successful entrepreneur. As a philanthropist, Gates is not “giving back” to the world, as if he had taken from it in the first place. His philanthropic giving is possible only because he first “gave” as an entrepreneur.
…For all we know, the software billionaire was motivated just by self-interest and a desire for profits. Still, he and Microsoft succeeded only because they provided value for hundreds of millions of people.”
It’s so easy to forget this, but we mustn’t.
We must remember and hold in tension the simple truth that one does not become an angel simply by walking through the doors of a non-profit company (or government for that matter) just as much as one does not become a greedy, oppressive powermonger when stepping into the for-profit sector either.
The Dark Side of the Force: A Broken and Marred Harmony
To be thankful for what we have been given does not mean that all is well. The world isn’t that beautiful and glorious…yet.
The reality is that we are all tempted unto greed, power and the misuse and abuse of people and resources. No one is immune to this. Bad things happen. People abuse the system and one another–engaging in deceit, dishonesty and fraud. Whether it’s “cooking the books” to record a profit when there really isn’t one or the embezzlement of funds that belong to someone else. The harmony we observe is a broken one – interlaced with the discord of our fallen natures.
However, it’s important to remember that sooner or later the crooks get caught. Moreover, occasions of dishonesty, fraud, and abuse should not and must not be used as fodder to denounce profits or the profit-loss dynamic altogether. To do so is the equivalent of denouncing the entire game of baseball because some players were found to be cheating. The long term reality of the universe is that people who practice such deception do so at their own peril.
Rather we should give thanks that we are still able to correctly identify who is honest and who isn’t. This is something that markets do quite well. The inability to correctly identify who and what is deception is a far far worse reality. Confusing profitability with dishonesty is a slippery slope.
Driving Blind – What happens without a clear profit-loss dynamic?
Some very important social institutions lack the benefits derived from the profit-loss incentive which free markets naturally provide and encourage. Stewardship and service suffer as a result.
Government organizations and their many social programs are a glaring examples of this. Although touted as existing for the “public good”, government programs often end up wasting valuable resources and “serve” only to help officials get re-elected or re-appointed. Since they are not accountable for how they use capital resources in the same way private companies are, they are often blinded to what responsible stewardship and true service unto others actually demands.
Just take a look at the Federal Government’s debt problem. The Federal Government has amassed an amount of debt so large it borders on inconceivability. The national debt figure is approaching $20 trillion by the end of the year. By the time you read this, it may have already surpassed it.
Last I checked it comes to about $60k per citizen and over $160k per taxpaying citizen. That’s reason enough for concern and yet what’s more concerning is the the rate at which it is growing. It has almost tripled in just over 10 years. It shows no signs of abating any time soon.
One must ask who is served by all this?
Any business wanting to sustainably steward resources would immediately call this expansion the very definition of unsustainable. Yet, the conversation in Washington hasn’t been about cutting federal spending, it’s been about how much they can continue to spend and how much they should raise the congressionally approved debt limit. According to their website congress has approved to raise the debt ceiling 78 times since 1960.
There is some serious dissonance here.
It’s a worthwhile thought experiment to imagine if runaway debt like this would ever happen if the Federal Government had to operate under the same constraints as private companies.
I think it’s highly unlikely.
Investors and financiers would have pulled out their capital long before even approaching the current debt levels we observe today. It’s much more likely that after the second or maybe the third time spending exceeded revenue, they’d have shut the whole thing down and tried something else.
Alas, that is not the world we live in!
Without the guidance and accountability of the profit/loss dynamic, the federal government has much to answer for in terms of both stewardship and service.
Conclusion – Give Thanks for Profits and Losses!
Instead of naively thinking we should abolish profits (a dangerously destructive idea), we should give thanks that we have a way to measure and receive feedback on how effectively we are stewarding what God has entrusted to us and how well we are serving others with those resources.
Next time you hear about how profitable a company is instead of letting the temptation of envy or jealousy overtake you, or immediately attribute dishonest motives to them, think instead about how that company must be stewarding and serving its market really well and rejoice with them! Now wouldn’t that be something!
The etymology of the word profit serves as a helpful reminder for how to correctly understand profit and loss. The word comes from the latin root, profectus meaning “to advance or progress.”
Isn’t that ultimately what profits measure and reveal to a business? They communicate whether progress is being made towards the effective stewardship of capital resources deployed in the valuable service unto others.
In light this, shouldn’t we all be for profit?
What did you think about this essay? Do you agree or disagree? Why? I’d love to hear your thoughts!