Business is the act of earning money or creating or producing goods and earning income by either buying or selling these goods. Simply put, it’s “any undertaking or activity entered into with the intention of making a profit.” Business can be anything from renting a place to running a business to owning a business.
The total revenue of any business is equal to the total amount of money that was paid out or received by the firm for doing business. Income is a sum of money coming in from various sources such as wages, interest, rent and profits. A firm has to consider all these things before calculating profit. Profit is basically the difference between total revenue and the value of the assets or goods produced or sold by a firm. In order for a firm to be able to calculate profit, it has to know how much income it gets from doing business. All these key terms have to be understood before computing profit.
Market price is equal to the current cost less the amount of profits earned. Current cost refers to the price at which production is carried out by the firm. Present value is the future value of money that would be paid to the employees, owners or creditors if the firm continues to operate. Present value is also equal to the amount of money that would be paid to the shareholders of the firm in the event of the death of all the members of the firm.
Profit maximization is an economic principle that guides firm decision making. It states that the firm should maximize the sum of profits it earns from its activities. By maximizing profits, the firm increases its net worth. The basic logic behind profit maximization is that firms should invest their money on capital improvements that will increase the firm’s ability to earn profits. On the other hand, firms should spend less on fixed overhead costs like buildings and supplies.
Maximizing profits means that the firm should do all things in its capacity best. The best possible use of human capital, knowledge and technology is one way that firms increase profits. A firm can improve the effectiveness of its sales representatives by improving training methods, creating a good customer service program and using technology efficiently. Firms can maximize their profits by increasing the value of their total revenue. The total revenue refers to the income derived from selling goods and services minus the cost of good sold.
There are different perspectives on how firms should maximize their profits. Some business managers believe that it is the shareholders who should be the prime beneficiaries of the firm. Others argue that it is the customers who should be the main stakeholders. More recently, some corporate managers have come to view employees as the prime stakeholders. One thing is for sure, however, that increasing profits is a major objective of all businessmen.