The Purpose of Profit

Profit serves three purposes. One is it measures the net effectiveness and soundness of a business's efforts. Another is the "risk premium" that covers the costs of staying in business- replacement, obsolescence, market risk and uncertainty. Seen from this point of view, there is no such thing as"profit"; there are only "cost of being in business" and "costs of staying in business." And the task of a business is to provide adequately for these "costs of staying in business" by earning an adequate profit. Finally, profit ensures the supply of future capital ofr innovation and expansion, either directly, by providing the means of self-financing out of retained earnings, or indirectly, through providing sufficient inducement ofr new outside captial in the form in which it is best suited to the enterprise's objectives.

From The Daily Drucker, The Practice of Management