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Where does profit come from?

If rent comes from land/property, and wages come from work, where do profits come from?

My suggestion is that profit (like losses) come from risk.

With any risk there are five options:

  • Avoid it
  • Reduce it
  • Transfer it
  • Accept it
  • Increase it

 

If you eliminate risk completely you eliminate profits, so the goal is to take calculated risks. But, the problem with many businesses is that they are structured not to lose, rather than to win.

They do what everyone else is doing, the are normal or average and they produce at best average results. So, one of the things recommended in the On-Track programme is to a) see risk as positive and b) innovate so you stand out from the crowd. You literally need to become “outstanding”.

Peter Drucker (one of the most well known a d respected business consultants) split risks into three categories:

  • Affordable
  • Non-affordable
  • Compulsory

 

Affordable risk is innovation that if it doesn’t work, won’t cost you much. And, if it does work probably will not create a significant¬†competitive¬†advantage.

Non-affordable innovation is where a business lacks the knowledge around the innovation. And, if the innovation goes wrong you could end up building the competitions business!

Compulsory risk is what you need to do to avoid being overtaken by the competition.

As Accountants based in North London we encourage all businesses to innovate and create the difference that makes the difference.