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Profits are defined as the difference between the income of a business and its expenses. Increasing profits is important for a couple of reasons. First, if a business is not making a profit over time, then it will more than likely go out of business. Profits reward the owners of the business, whether it be private owners or shareholders in a company that are rewarded with higher dividends.
If profits are not returned to the owners, they are usually reinvested in the business. This can have a positive effect . It can lead to new or improved products for the business. It can also mean better working conditions for employees and better wages. Profits can also be used altruistically by helping local communities, which could mean positive feedback from the public and increased business.
To me, the most important ways in which increasing profits helps a firm are these:
- It does, of course, increase the value of the business. If the firm is privately owned, the profits go directly to the net worth of the firm. If it is publicly traded, it allows the firm to increase its dividends (if it wishes) and it most likely allows the price of shares in the company to increase.
- It also allows the business to expand if it so desires. The firm can use the extra profits to invest in new equipment or new stores or whatever other sorts of new inputs will help them to grow.
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