
Why we choose profit - axelfontaine
https://m.signalvnoise.com/why-we-choose-profit-e511efc4dcb9#.alb28yo1w
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dmccunney
Profit is not a "choice", it's a _requirement_.

The one thing we can say for certain about tomorrow is that it will be
_different_ from today. We don't know (and likely _can 't_ know) how it will
be different - only that it will be.

To survive and prosper tomorrow, we probably need to _stop_ doing some things
we currently do, _start_ doing some new things entirely, and do some things we
continue to do _differently_ than today.

Making these changes requires resources. We need raw materials and machinery
(if we are making things), we need skilled labor, we need management, and we
need capital. We must _invest_ in our enterprise.

Chances are, we don't have the capital just lying around. Soundly run
companies are generally fully invested. So we must _get_ capital from
_outside_ of our enterprise. We may get it in the form of equity, by selling
stock, or in the form of debt, by getting loans.

Either way, that capital has a _cost_. Shareholders expect to make money
through increasing in the value of their stock or dividends paid or both, and
how likely they are to _buy_ depends on how likely they think they are to make
the desired money on their investment. Lenders are interested in whether we
are good for it and will _repay_ the loan. They charge interest on the loan,
and the _amount_ they charge will reflect their perception of the risk they
assume in _making_ the loan. The stronger your balance sheet, the less risk
they will perceive, and the lower your rate will likely be.

The usual mantra chanted by profit making enterprises is that they wish to
make as high a profit as possible. It's the wrong answer.

The correct _question_ is "How much profit do we _have_ to make to cover our
marginal cost of capital?" For many firms, the answer to that question will be
_higher_ than their most optimistic estimate to how much they _can_ make.
They're in trouble.

