Tag: mutuals

Profit, cost and loss

10th May 2024

Maximising profits seems to be the name of the game, the chief goal of businesses, educational establishments, public services, governments etc. But what are profits and are they intrinsically good?

What is profit?

A profit is an advantage or benefit, or more specifically a financial gain. The word’s meaning comes from the Latin ‘profectus’ meaning growth,  advance, increase, success or progress. From this there comes the idea that to profit  is to benefit.

In business terms profit may be understood as:-

Gross profit = revenue from selling a product or service less costs of materials used in producing it.

Operating profit = gross profits less operating costs such as of labour, machinery, depreciation, rent and utilities.

Net profit = operating profit less all other costs such as taxes and interest payments.

Who benefits from the profit?

• The business owner who can simply pocket the lot. 
• The business owner as a return on his/ her investment – possibly a risky investment. 
• The business if the owner reinvests the profit in the business. Such investment could upgrade the business’s resources, infrastructure, and/or workforce, and so improve productivity. 
• The shareholders if the profit is shared as a dividend. 
• The employees if the profit is shared as a bonus.
• The country may benefit if tax is paid on the profit.

The company and its shareholders may also benefit in other ways. Increasing profits can increase the value of the company’s shares which benefits the share holders (if they choose to sell) and increase the value of the company. The latter can benefit the company if the owner wished to sell or, conversely, protect the company if the owner wished to avoid being bought out. It can also benefit the company by making it easier for it to obtain finance for its operations. Maintaining and indeed improving profits also safeguards the jobs of the senior members of staff.

But are higher profits always better?

Increased profits may not be better for the consumers who may be contributing to these profits through paying higher prices. Last summer UK supermarkets were accused of ‘greed-flation’ as they reported significant profits whilst food price increases peaked at nearly 20%. 

Increased profits may not be better for employees who may face redundancies and pay cuts in order to maintain profits. Labour costs are often the first things a business tries to reduce to improve profitability.

Increased profits may not be better for the environment, if more damaging processes and trading practices are used to reduce costs and increase profits. Some companies transfer operations to other countries where there are lower environmental protection standards – or where there is cheaper labour and/ or lower welfare requirements. 

Increased profits may not be better for the environment if they also increase pollution. Increasing oil production leads to more flaring and more oil leaks damaging the environment. Increasing profits through sales of more takeaway meals, increases the use of single use plastic and the pollution it causes. 

Increased profits may not be better for the environment if the increase comes from the increased production of a product that is intrinsically damaging – whether that is carbon producing fossil fuels, or muck and methane producing cattle/ chickens etc. 

 All the above will also have adverse effects on the local community either though increased local unemployment or through increased pollution. Local communities can also be affected if the increase in profits arises from increases in production leading to increases in delivery traffic. 

If the increase in profits only, or disproportionately, benefits those on high incomes, that can increase environmental damage as those on high incomes tend to have lifestyles with a higher carbon and environmental footprint. It can increase social inequalities that undermine social cohesion and wellbeing. It can create inequalities in power, resulting in the community/ society/ economy being shaped to suit those with most money – further disadvantaging the low paid and unemployed.

The increase in profits may not benefit the host country if the company can arrange its affairs so that its tax is paid elsewhere – probably at a lower rate.

Do markets prevent excess profits? 

According to pure economic theory the movement of the market will prevent excess profits being made. For if a business makes more profits than expected, other companies will enter the market and such competition will continue until profits return to the normal level. In reality markets are not perfect. It can be hard for new or small firms to enter especially of the start up costs are large – eg in the oil industry, in supermarket chains etc. 

It maybe that a company holds an effective monopoly – rivals to ‘X’ cannot offer their customers the same audience base. Ditto for an online market trying to compete with Amazon. 

Information is not perfect. Many consumers may not know that Starbucks does not pay a fair proportion of taxes in the UK, that Shell is not paying for the safe dismantling of its disused oil pipelines, allowing them to leak toxic chemicals into the North Sea, or that their supermarket chicken has come from a factory farm that is polluting the River Wye. If customers knew these facts would they be as willing for pay for the products that generate profits for multi national companies?  Sadly it maybe that many customers have a low income that prevents them making other choices.

Does profit have to be the over riding priority?

No, other business models exist.

• Charities and not for profit businesses operate in the basis that the prime objective is to pursue the mission of the organisation, and if profits arise, they are to be used to support that. eg The National Trust, the Big Issue, The Peabody Housing Association.
• Social enterprises which aim to promote, encourage, and make social change. Any profits are reinvested in the enterprise. eg Belu who sell bottled water who donate their profit to Water Aid. Clean For Good is a London based cleaning company that promotes fair and ethical employment of cleaning staff; profits are shared between reinvested, cleaning staff and shareholders (charitable bodies such as  the Parish of St Andrew’s in the Wardrobe, CMS, and the Centre for Theology & Community.
• Cooperatives are companies owned and controlled by its members so as to meet their shared needs. eg Suma is a workers’ cooperative – its business is owned and run by its employees who then share equally in the profits. Energy 4 All helps develop community owned renewable energy projects. Members receive a fair return on their investment from the sale of green electricity but at a level that is capped so that the balance of the profits can support the community fund enabling more such projects. 
• Mutuals are companies which are owned by their customers, who share in the profits. eg Scottish Friendly which is a finance services provider whose profits are reinvested in the business. NFU Mutual which is an insurance company for the farming industry. It has 900,000 members and any profits made are shared between them.
• Impact businesses have two ‘bottom lines’, one being profitably and the other a dedicated issue that could be social, environmental etc. eg Octopus Energy aims both to be profitable and to make the renewable energy transition faster and cheaper for its customers. Hey Girls sells period products using a buy-one-give-one model to end period poverty and improve period health. 
• B-corps are impact businesses that have been certified by B Lab – a world wide certification body – as meeting specific target levels vis a vis their social impact. eg The Guardian is a B Corp with a commitment to using its profits to support carbon neutral policies, reporting on climate change and, for example, not accepting advertising from fossil fuel extractors. OddBox takes fruit and vegetables that would otherwise go for waste – because they are too many or too few in number, the wrong shape or otherwise unwanted by retailers – and sells them via a veg box scheme.
• Credit Unions are community-based financial organisations where profits are used to support local initiatives or are repaid to members. Members may have to qualify by living in a certain area or working within a certain industry or for a specific employer. Members are often encouraged to save money with the Credit Union before applying for a loan.  
• Community share schemes allow people to invest  in a local scheme via ‘withdrawable shares’ – these cannot be sold, traded or transferred, and whilst the share holder may receive interest on their investment, no dividend is paid. All members have an equal vote in shaping the policy of the company. Members can withdraw their share – but only if the company has the funds to buy them back. Community share schemes are used for to support nurseries, pubs, local transport schemes and preserved railways etc.

There are many ways of running businesses that benefit society in ways other than purely financial. These are the truly ‘profitable’ businesses!