Truth About Profit
Bahram R. Shahmardaan, PhD
The above statement raises some very interesting points about the role of Profit. The word profit can be split up into "pro" and "fit". So Pro-fitness or Profit-ability allows a business to survive and grow.
Like everything else in life, the economy goes through cycles of ups and downs. This in turn affects business. Generally speaking Businesses make a profit during an upturn and lose money during a downturn. So Profit is only the excess that enables a business to sustain itself and grow and change through the downturn in an economy. Without profit a business will be unable to sustain itself through the lean times.
But to whom does the Profit belong? If all wealth belongs to the Divine, who gets the profit? As mentioned in an earlier article, the factors of production are Man, Money and Machinery, which include land. Those who contribute Capital i.e. money like to think that the Profit is theirs to keep. The argument offered is that they are risking their capital and therefore they are entitled to the profit. Some of the so-called Capitalists forget that they are only risking their capital, which can be replaced. The people who work to make the enterprise successful are risking years of their lives… years, which cannot be replaced. So when a business fails, the people who worked for the failed business have lost a much more valuable asset than the capitalists.
So when it comes to sharing the profit, we have to take their contribution i.e. the years of their lives into consideration. So who is entitled to receiving a portion of the profit? The following groups come to mind:
The investors, the workers, the business itself and Society at large.
Investors are certainly entitled to a portion of the profits. No one will argue with that least of all the investors themselves.
Some people may argue that the workers are getting a salary, so why should they receive any profit. After all they have not risked anything. As pointed out above, the workers have put their faith in the company and have risked their well being by doing so.
The business itself needs a portion of the profits to sustain it. So a portion of the profits have to be reinvested in the business in the form of Research and Development, continuing education of the workers, new machinery etc.
Society at large is entitled to a percentage of the profit, because a business cannot function in a vacuum. Without people, and society is made up of people, there would be no business. Some may counter that a business pays taxes, so why should we give a portion of the profits to Society. We pay taxes to support the services provided by the Government. That does not relieve us of our debt to Society in general. So a business has to be responsive to the needs of the society and should support social causes.
How to divide the profit? Since the workers are receiving a salary, to be fair to the investors, the investors should be paid the opportunity cost of doing business. If the investors would put their money in a bank, they would have no risk (so the argument goes) and would earn interest. So from the Profit of the business, the amount the investors would have earned as interest should be deducted. The balance of the profit can then be divided into four parts as follows:
30% for the Investors, 30% for the workers, 30% reinvested in the business and 10% for Society to be set aside for Relief and Rehabilitation Reserve i.e. the present situation in Ahmedabad, Bhuj etc.
The above percentage distribution of profits is suggested to provide a starting point for discussion. The percentage can change depending upon the situation of the particular business in question and the state of mind and values of the investors and workers. However if we remind ourselves that all wealth does belong to the Divine and that we are only trustees, we should have no problem in sharing the profits with the Universe at large of which we are but a part. The investors as well as the workers of an enterprise should be willing and able to share with joy an increasing percentage of the profits of the enterprise they work for and/or control.
This view of profits presupposes investors who are benevolent and view themselves as Trustees of the wealth of the Nation and workers who accept their responsibility to work diligently for the benefit of their employer and the Nation.
Bahram R. Shahmardaan, PhD