The economics of a business

The main objective of any business is to generate a profit for its owners, although this objective has been forgotten by many entities, which often leads to trouble.

The owners of a business are the shareholders who provide equity and risk capital. The owners may choose to appoint professional managers to run the business on their behalf. The professional manager should never forget that his main objective is to make a profit and pay a dividend to the owners.

The business manager may go to a lender to obtain more capital to operate and expand the business. The lender will provide capital based on the strength and prospects of the business. The lender will demand an interest payment and collateral to cover his risk. The business manager may also get raw materials on credit from suppliers.

The business manager hires people and buys equipment to provide products and services to a certain group of customers. He does his market surveillance to understand what his target customers want and how much they are willing to pay. He computes the cost of providing such goods and services and adds a reasonable markup to cover his overheads, pay the interest to the lenders, and pay dividends to the shareholders.

The business manager knows that he is competing with other businesses, so he has to provide the best goods and services at a reasonable price. He also has to keep his costs low so that he can generate as much profit as possible. He has to make good investments in marketing, product development, equipment, etc. This way, he maintains his competitive advantage. The business will thrive as long as the manager is able to provide value to his customers and retain some of it for the business.

Shareholders may sell their ownership stake in the business to the general public by listing on the stock exchange. Shares of publicly traded companies trade at different prices throughout the day, and anyone can become a shareholder by buying shares. Share prices largely correlate with business performance over the long term, though in the short term, prices may be driven by mere speculation.

This profit motive must not be forgotten by the shareholders or business managers of any business venture. Business is not a charity or a popularity contest. Its main aim is to generate a profit for its owners.