| Profit is not a "choice", it's a requirement. The one thing we can say for certain about tomorrow is that it will be different from today. We don't know (and likely can't know) how it will be different - only that it will be. To survive and prosper tomorrow, we probably need to stop doing some things we currently do, start doing some new things entirely, and do some things we continue to do differently than today. Making these changes requires resources. We need raw materials and machinery (if we are making things), we need skilled labor, we need management, and we need capital. We must invest in our enterprise. Chances are, we don't have the capital just lying around. Soundly run companies are generally fully invested. So we must get capital from outside of our enterprise. We may get it in the form of equity, by selling stock, or in the form of debt, by getting loans. Either way, that capital has a cost. Shareholders expect to make money through increasing in the value of their stock or dividends paid or both, and how likely they are to buy depends on how likely they think they are to make the desired money on their investment. Lenders are interested in whether we are good for it and will repay the loan. They charge interest on the loan, and the amount they charge will reflect their perception of the risk they assume in making the loan. The stronger your balance sheet, the less risk they will perceive, and the lower your rate will likely be. The usual mantra chanted by profit making enterprises is that they wish to make as high a profit as possible. It's the wrong answer. The correct question is "How much profit do we have to make to cover our marginal cost of capital?" For many firms, the answer to that question will be higher than their most optimistic estimate to how much they can make. They're in trouble. |