16 March 2015

In defence of profit


What does a business do with the profit it makes? Toss it in the air and dance beneath it? Stash it away in offshore accounts? Transfer it all to the boss’s pay packet? There are plenty of people who think this is exactly what happens. They’re the people who spit the word profit, who consider the pursuit of it vulgar and the accumulation of it morally reprehensible. They’re the people who think that profit is a dirty word and they’re often the people who have never had to make one.

These are the people who see business as nothing more than a tug of war between bosses and workers, with profit sitting as the prize in the middle. Some of these people in the UK are calling on the opposition Labour Party to introduce a law that would compel firms with more than 50 employees to distribute profits among employees. Too much goes to the bosses, they argue, not enough to the workers themselves. True, most employers make more than their employees and true, there are business models (that ought to be encouraged) where workers have a stake in the business itself. But one thing that unites all business, from the coffee stand to the tech giant, is that profit is the lifeblood of enterprise. There would be no jobs and no tax receipts without it. It may be unfashionable to say so, but it ought to be said a great deal more often.

Thirty years ago my mother started serving tea and cake from a small shed along a coastal path near the farmhouse in which I grew up. Today, the original outline of that little hut can still be seen, but it sits among a hundred other tables as part of the larger restaurant and bar that the business has become. Many factors and conditions made this transformation possible, chief among them the never-ending energy and hard work of my mum. Another reason is decades of reinvesting the profits of this micro-enterprise: from a bigger oven and another pair of hands at first, to a major extension and staff accommodation in later years. In fact, there hasn’t been a year of trading when my parents didn’t reinvest in the business, and this includes investing in their employees.

This is the reality that left-leaning politicians and media commentators find so hard to understand. Profit is rarely hoarded, it is reinvested. It is spent on paying down debts, on buying new stock, on hiring more staff and on growing the business. All being well, it’s spent on pay rises and improved conditions. Indeed, a recent survey of members of the Institute of Directors, of whom 70% run small and medium sized enterprises, showed that over half currently rely on the profit they make to fund directly the continued running of their business.

Entrepreneurs, directors, owners and managers will always know better how to handle their profit than politicians and policy wonks who have never even worked in a business, let alone run one. Pulling a lever in a government department and commanding hard-pressed small businesses to distribute their profits in the form of higher pay is a policy that can only be advocated by someone who has never confronted soaring overheads or the effects of creeping taxation. It may promise a quick fix and a sharp boost to our pay packets, but in reality it will deter investment, hold back growth and prevent businesses from taking on new staff. Put simply, if Labour’s flirtation with compulsory profit sharing among firms with more than 50 employees becomes government policy, then get used to seeing a whole lot of businesses with 49 members of staff.

Christian May is Head of Communications and Campaigns at the Institute of Directors.