As we know that main objective of any industrial enterprise is to produce good quality products to serve the society and thereby to earn maximum profit. For this purpose the enterprise has to concentrate to financial matter along with technical matters. Although we have discussed some of the financial matters in the book at relevant places, here we are discussing some other important matters from the financial management point of view.

Theories of Profit

Various theories of profit have been put forth by different economists to explain the profits. The important among these are:

1. Risks and Uncertainty theory

2. Dynamic Approach to the Profit theory

3. Rent theory of Profits.

Risks and Uncertainty Theory

This theory was introduced by Howley and according to him net profit is the residual income of the owner after making payments for all factors of production and is the reward for the risk taken by him. It concludes that profits are due to the risk taken by the owner. The owner has to bear the risk of losing capital; there are certain risks which cannot be insured. They are known as uninsurable risks. We cannot predict that when fashion will change or when new invention will come or when will war outbreak etc. There are unforeseeable changes and hence in value risks which cannot be insured payments made for these uninsurable risks are called 'profits'.


Dynamic Theory of Profit

Mr. J.B. Clark introduced this theory. According to Clark, the pure profit in a dynamic society is the residual income of the owner after making all payments including rent, wages interest and salary of management. Such pure profit in the form of residual earning result only in a dynamic society where the changes in population, changes in the stock of capital, changes in tests or fashions, changes in production techniques and changes in management principles etc. occur dynamically. In a static society since there are no such changes, no pure profit may result. Thus pure profit is a sign of progress. Thus to increase profit an owner may produce a new commodity, popularize it and earn large profit and soon competition sets in; the profit decline. Thus in maintaining pure profits high continues progress is essential.

Rent Theory of Profit

This theory was introduced by Walker, who considered profit as a form of rent. He says that owner earns profit in the same way as land earns rent.

Marshall has criticized theory for the following reasons:

a. Whereas rent on land is in the form of surplus earnings, profit is not.

b. Land may produce zero or positive, zero or negative rent whereas net profit may be positive, zero or negative.

Next Chapters

Estimating Procedure
Difference between Estimating & Costing
Depreciation & Obsolescence
Material Cost Calculation
Calculating Labor Cost
Direct and Indirect Expenses
Component Cost
Machine Shop Estimating
Forging and Forging Types
Starting an Organization
Welding Cost Estimation
Jigs and Fixtures
Qualities of an Entrepreneur
Starting Small Scale Industries
Budget and Budgetary Control
Supply & Law of Supply
Exchange and Barter Exchange
Classification of Market
Money and Types of Money
Trade Cycle
Break Even Analysis
Financial Management

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