Why A Business Must Be Profitable

by Frederick Mann
(edited)

Some people are concerned when they find out that we are a profit-making business. Some people even denounce us, because they believe that profit is evil.

We do our best to provide our customers and the world in general with value. Many of our customers apply the information they purchase from us to save money, to make more money, and to improve their lives in many ways. We believe that the quality of our information is such that most of our customers receive more in value than they pay for our information. We attempt to have win-win transactions with our customers.

Profits and losses are indications of whether we're doing the right things or not. It's how the people in the marketplace tell a business what is needed and wanted, what should be eliminated, what should be expanded, what needs to be improved, etc. Profits and losses constitute important feedback that improves economic efficiency.

Profits also enable us to grow. If what we're doing is good, then we need to grow so we can do more good. If we don't make profits, then there's something wrong with what we're doing, and we deserve to go out of business.

Why profits are good and why they work. Some time ago I visited Albuquerque, NM. On the eastern outskirts of the city is the longest cable car in the world. I took the ride to the top of the mountain. As I was going up I wondered: "Why is this cable car here? What useful purpose does it really serve? Why is it possible for people to spend time and money riding up and down the mountain in this cable car? How can they afford it?"

There�s something very important here to think about. The reason we can do all these things � build and ride in cable cars, go to the movies, play golf, watch football, etc. � that on the face of it don�t seem very productive, is that someone is producing more than they consume. Most fundamentally, profit is the difference between what�s being produced and what�s being consumed � surplus production. Therefore profit is a very noble value. All our buildings, roads, communication systems, computers, and other manifestations of advanced civilization came about because some people produced more than they consumed; they made a profit.

Another major implication of surplus production or profit is that the economy isn�t a zero-sum game. It�s an expanding pie. So the fact that you make a profit means you�re expanding the pie. Because of this, you can enjoy guilt-free success by producing more than you consume; you don�t have to "steal" success. (See Report #13A: The Millionaire's Secret (I), for a detailed description of these things.)

The following article tells you more about why it's necessary to make profits.

MAKE A PROFIT OR DIE
by Harold Porter

There are LAWS in the universe.

Some people elect "legislators" to "represent" them in Washington (or somewhere). These "legis-lators" have in that title the two Latin words: legis meaning "law" and lator meaning "proposer." The "laws" they propose are not LAWS; they are the momentary whims of the "proposers" (or the "people"). They are elected to "make laws" and - darn it - they do!

Twenty-five years ago I became concerned that we were losing our freedoms in the USA as a result of those well-meaning (?) legislators. I began a search to find a country that was free. That search ended with the belief that the USA was one of the freest on Earth. Bad as it is, it's the best available. Following that pitiful search, I became involved with a venture to start a new country. In blissful ignorance, I thought that a beautiful tropical island, good principles, enthusiastic people, grit, determination, and great ethics would create a paradise that couldn't fall. To my consternation, I discovered that the organization of the country included no technique for generating profit. Failure to generate a profit will inevitably result in failure of the organization. Great surprise!

After that loss of emotion, money, time, friends, and - very nearly - the loss of my life, I began to understand how little I understood about the LAWS of the universe concerning the rise and fall of organizations ... countries included.

As a generalized principle:

All Organisms Must Show a Profit
- Or Die

Examples abound. They include all life, from the smallest amoeba to the largest star.

Entropy is a word physicists use to describe the concept that unrecoverable losses occur in any closed system; that the system "runs down" as time passes. A thermodynamicist uses the "second law" [of thermodynamics] to describe the same phenomenon. The vulgar express the same idea with fewer words on a bumper sticker: "Shit happens." We all know - intuitively - that things need lubrication, paint, maintenance, and replacement or they will fray, deteriorate, wear out, or plain "break." This is a LAW.

Where does one get the resources for maintenance? If a system simply "breaks even," there is no available source for counteracting entropy. Only if one creates more than that which is necessary to "function" - a "profit" - are there assets which can be used for upkeep.

Yet some people see "profits" as evil. Ants - yes, I mean the little buggers in the garden - know enough to produce profits. Yet people occasionally, and mistakenly, think that profits are an unnecessary function, and are somehow sinister.

Whales and sea lions store fat. Potato plants produce tubers. Grasses make rhizomes, dogs bury bones, squirrels cache nuts, woodpeckers store seeds, ... Yet humans are so "smart" they make claims to the contrary. In all of life, profit yields success and failure to make a profit results in death.

John Scarne wrote "The Bible" on gambling. In it he spends a lot of time telling people that "the house" is going to win because they've stacked the odds in their favor. Scarne spends many pages showing "the uninitiated" that even if the odds were "even," you still wouldn't win because your "bank" is so much smaller than that of the casino. His point is that strings-of-losses occur and when you can't cover the losses you leave the table with less money than you had when you arrived. Good point! You must show a profit!

In business, the difference between phenomenal success and dismal failure is often tiny. As a percentage, it is almost always less than ten percent, and is regularly less than five percent. There are charlatans who say things like: "General Motors made two-hundred-million dollars last year. They can afford to give us a 7% raise." These people don't understand that one year of profit means little to the life or death of an organization. They don't understand that the profit-ratio (= 0.002 in this hypothetical case) is so tiny that the organism could die with the first tiny fluctuation of the market.

Some years ago NASA asked the question, "We can usually recognize life on Earth. How would we recognize life on another world?" The most reliable answer was: "Look for something that has processes running in the opposite direction of entropy."

Among humans, the exceptions to the principle are almost always non-voluntary. States support themselves by theft. Religious organizations usually support themselves by threats, often hidden as "you won't get into heaven" or some such.

Most organizations find some technique for producing value and selling it at a profit; even the Sierra Club has found that it cannot live solely upon "mooch"ing; it makes money from selling calendars and other items - at a profit.


Letter from Carl P.:

"Dear Frederick,
About the guy who says profit is the opposite of freedom - people are conditioned to believe profit is a dirty word, that it means taking something away from somebody else (is that why the IRS penalizes profit?) Not so... Profit is one of the primary results of freedom. It results when intelligence, knowledge, effort, and efficiency are combined with freedom of action. A company that makes a profit can expand research to increase knowledge, and hire more people; in general, benefiting the economy. Profit is growth; and growth benefits others, for those who worry first about that. Unfair profits can be created by government regulations which block competition. In a free society profits are entirely the result of voluntary trades, nothing could be more fair. If efforts did not yield profits, why bother? Profit is progress, and it helps to expand happiness. Is progress evil? Is it wrong to be happy? I'm reminded of a quote from Ayn Rand that goes something like this: "That which is good is made to seem evil, just because it is good." Benevolence is good, but altruism is evil because it requires sacrifice. I don't believe in human sacrifice. Enough said?"