Business and profits and its role in society-An Ethical Perspective

1. Business & Profits
and its Role in
Society

2. A business (also called a company, enterprise or firm) is a
legally recognized organization designed to provide goods
and/or services to consumers. Business are predominant in
capitalist economies. Most businesses are privately owned.
A business is typically owned and formed to earn profit that
will increase the wealth of its owners and grow the business
itself. The owners and operators of a business have one
main objectives i.e receipt or generation of a financial
return in exchange of work and acceptance of risk. Notable
exceptions include cooperative enterprises. Businesses can
also be formed not-for-profit or be state owned.
Background

3. Gross Profit = Sales Revenue (Less) Cost of Goods Sold
(COGS),thus removing only the part of expenses that can be
traced directly to the production of the goods. Gross profit still
includes general (overhead) expenses like R&D,S&M,G&A, also
interest expenses ,taxes and extraordinary items.
Operating Profit = Gross Profit (less) all operating expenses.
This is the surplus generated by operations. It is also known as
Earnings Before Interest and Taxes EBIT , Operating Profit
Before Interest and Taxes OPBIT or simply Profit Before
Interest and Taxes PBIT
Different Measures of
Profit in a firm

4. Net Profit = Profit After Tax (unless some distinction about the
treatment of extraordinary expenses is made).In the US the Term
Net Income is commonly used. Income Before Extraordinary
Expenses represents the same but before adjusting for
extraordinary items.
Net income (less) dividends becomes retained earnings.
There are several additional important profit measures, notably
EBITDA and NOPAT.
To accountants, economic profit or EP , is a single-period metric
to determine the value created by a company in one period
usually a year.
Different Measures of
Profit in a firm

5. (Net) Profit Before Tax PBT equals operating profit less
interest expenses (but before taxes).It is also know as
Earnings Before Interest EBT, Net operating income before
taxes or simply Pretax Income.
Some economists define further types of profit:
• Abnormal profit (or supernormal profit)
• Subnormal profit
• Monopoly profit (super profit)
Optimum Profit: This is the “right amount” of profit a
business can achieve. In business, this figure takes account
of marketing strategy ,market position, and other methods
of increasing returns above the competitive rate.
Different Measures of Profit in a firm

6. Organization Approach towards…..
Shareholder Stakeholder
1.Narrow Focus, driven by numbers
and things that have been qualified and
measured
Sustainable, competitive thinking that
tends to be visionary
2.Executive Management may react to
valuations in dramatic ways (merger,
layoffs, etc.)
Multi-view of the organization
regardless if it is quantifiable.
3.Performance evaluation tends to be
financially focused with little
emphasis on intangible drivers of
performance.
Performance evaluation follow
strategic issues, not just operations.
4.Sources of value tend to be isolated
systems, fragmented and not coherent.
Strong value systems across the entire
value-chain, extending to external
stakeholder.
5.Slow to respond to change; new
ideas are not easily understood.
Easy flow of new ideas and innovation
(very change oriented)
Shareholder & Stakeholder view of
Profit
6.Management tends to quickly
embrace a quick fix solution,
sometimes adopting the latest fad
despite the fact that it may not fit or it
is not well-tested.
Management does not embrace quick
fix solutions; instead opting to avoid
paying a heavy price.

7. Shareholder Stakeholder
7.People who create value may be
viewed as “too radical” and somewhat
out-of-step.
People who create value are most
likely to advance within the
organization.
8.The bottom line focus is earnings. The bottom line focus is on value –
what value are we adding.
9.Traditional Approaches to growth –
allocate resources to marketing
,acquire other companies ,control
costs, etc.
Growth through the intangibles –
relationships, competitiveness
,knowledge workers; thinking in terms
of opportunities for growing the
business around core competencies.
10.Business success is what we create
for our shareholders.
Business success is what we create for
all stakeholders, not just shareholders.

8. A shareholder is the part-owner of the enterprise or company and such
he is interested in maximizing his profits. On the other hand the
stakeholders are the one’s who have a stake in the company and they
are the following.
1. Shareholders
2. Long Term Lenders
3. Employees
4. Distributors
5. Customers
6. Regulatory
7. Government
All the stakeholders have different expectations from their company or
enterprise. The shareholder’s want to maximize profits and their
dividend where as the long term lenders want to ensure safety of their
money and timely payment of interest. On the other hand, the customer
wants a competitive price and good quality and the distributor wants
timely payment. Regulatory authorities want to ensure that the
enterprise is running as per the laws of the land and the government
wants to see that they get revenue from the business houses.

9. The basic objectives of businesses is to develop, produce and
supply goods and services to customers. This has to be done
in such a way as to allow companies to make a profit, which
in turn demands far more than just skills in companies’ own
fields and processes. Companies improve their resources by
developing material and ideas. The goods and services
produced must see demands made by customer.
For example, Maggie Noodles of Nestle was a instant hit as it
has created time value for the modern working housewife as
she could make something to eat in 2 min time.
Role of business

10. 1. Supplying goods and services that customer cannot ,or do not
want to ,produce themselves
2. Creating jobs for customers, suppliers, distributors and co-workers.
3. Entrepreneurs make money to support themselves and their
families , pay taxes and use their wages to buy goods and
services.
4. Continually developing new goods, services and processes.
5. Investing in new technologies and in the skills of employees.
6. Building up and spreading international standards, e.g for
environmental practice.
7. Spreading “good practice” in different areas,such as the
environment and workplace safe.
Businesses/Companies benefits
society by:

11. • In fact, considered from all angles, is it unethical, NOT to
make profit. It is unethical, for a company ,to make losses.
Because, a company, to make losses , misutilises scares
national resources, can not pay back creditors ,does not make
wealth for its shareholders, make huge liabilities, upsets the
economy, promotes inefficiency and most importantly, can not
,at any cost discharge social responsibility, meets its welfare
commitments and jeopardies the future of its employees. Such
a loss-making company becomes a nuisance and a burden to
the economy and has no right to exist in the market place.
Moreover ,it has no right to force its employees into economic
insecurity, which is highly unethical.
• No business, however great or strong or wealthy it may be at
present, can exist on unethical means, or in total disregards to
its social concern, for very long. Resorting to unethical
behavior or disregarding social welfare is like calling for its
own doom.
Profits Not An Ethical Word.

12. • The Triple bottom line (abbr. TBL or 3BL) and also know as
“People,Planet,Profit”. Captures an expanded spectrum of values
and criteria for measuring organizational (and societal) success:
economic, ecological and social.
• The concept of TBL demands a company’s responsibility to be
stakeholders rather than shareholders. In this case
“stakeholders” refers to anyone who is influenced, either
directly or indirectly by the action of the firm. According to the
shareholder theory ,the business entity should be used as a
vehicle for coordinating stakeholder interests, instead of
maximizing shareholder (owner) profit.
Triple Bottom line Concept for measuring
Organizational Success

13. “People” (Human capital) pertains to fair and beneficial business
practices toward labor and the community and region in which a
corporation conducts its business. A TBL company conceives a
reciprocal social structure in which the well-being of corporate
labor and other stakeholder interests are independent.
“Planet” (Natural capital) refers to sustainable environmental
practices. A TBL company endeavors to benefit the natural order
as much as possible or at the least do no harm and curtail
environmental impact.
“Profit” is the economic value created by the organization after
deducting the cost of all inputs, including the cost of the capital
tied up. In the original concept, within a sustainability
framework, the “profit” aspects needs to be seen as the real
economic benefit enjoyed by the host society.
People, Planet and Profit

14. • Long Answer Questions :
Business is related to making profit, whereas Ethics deal
with right or wrong. Therefore business and ethics is not
related to each other. Discuss (Oct.10)
What do we mean by Business Ethics and what are the roles
and responsibilities of various stake holder in it? (Oct.10)
• Short Note : What is Triple Bottom Line – Explain the
term. (March 11)
Questions