Profit Motive: Definition & Meaning
What drives people to start a business?
It could be because they saw a gap in the market that they wanted to fill. It could be because they saw a desire for a particular product or service and wanted to be the one to provide it. Or it could even be because they just want to be their own boss and build something from the ground up.
Others may say it is all down to the profit motive.
But what exactly is the profit motive? And how does it work? Read on as we take a closer look at this financial term.
Table of Contents
- The profit motive is known as a person’s drive to partake in activities that will give them the most economic gain.
- Because of the profit motive, people are far more likely to innovate, invent, and take risks that they would not otherwise undertake.
- Profit motive is also used as a technical term by taxing authorities. This is to establish a basis for levying taxes.
What Is the Profit Motive
The profit motive is the intention to make money out of a project, transaction, or material activity. Profit motivation can also be thought of as the main driver behind any business activity that a person or company engages in.
To put it simply, the profit motive says that people will more likely than not take actions that result in them profiting or making money. Adam Smith, widely considered the Father Of Modern Economics, first brought up the profit motive in his book, The Wealth of Nations. He defined it as “the human propensity to truck, barter, and trade.”
Why Is the Profit Motive Important?
The profit motive is important because it enables you to understand the current economic climate. When someone has a profit motivation, they work to increase their wealth, which can benefit other people. For instance, if someone launches a firm with the intention of making money, their employees or any investors may also see an increase in their income.
9 Factors Used to Determine the Profit Motive
The Internal Revenue Service (IRS) has nine critical factors that they use to determine whether or not a business is run for profit. They are as follows:
- The manner in which the taxpayer carries on the activity.
- The expertise of the taxpayer or their advisors.
- The time and effort expended by the taxpayer in carrying on the activity.
- The expectation that assets used in activity may appreciate in value.
- The success of the taxpayer in carrying on similar or dissimilar activities.
- The taxpayer’s history of income or losses with respect to the activity.
- The amount of occasional profits, if any, which are earned.
- The financial status of the taxpayer.
- The elements of personal pleasure or recreation.
How the Profit Motive Works
The profit motive viewpoint would advise a corporation to eliminate the unprofitable production lines and increase investment in the profitable production lines. So for example, if it produces ten different goods but makes the majority of its earnings from just three, then it would eliminate the other seven.
Advantages of the Profit Motive
The profit incentive, in theory, guides everyone’s decision-making, from individuals to businesses. Many choices are made simpler when profit or the potential for profit is considered.
Disadvantages of the Profit Motive
There are a number of disadvantages that can come with the profit motive. It can give you an unclear understanding of business operations, as not every business will make every single decision based on pure profit.
People can also be more likely to ignore or give less importance to certain risks with the aim of increasing profits.
Example of the Profit Motive
Let’s say that a farmer grows apples and oranges. Each day they sell 80% of their apples but only 30% of their oranges. With a profit motive mindset, the farmer cuts down their orange trees and replaces them with more apple trees – therefore maximizing their profits and meeting the potential demand.
The idea of profit motive is an interesting economic term. It indicates that people or businesses will base their decisions on what will make them the most money.
However, when you purely focus on profit, you can end up ignoring other important aspects of your business. Profit is important for a successful business, but so is sustainability and workplace happiness.
FAQS on the Profit Motive
The profit motive is a strong feature of modern-day capitalism and the modern market economy.
It can be argued that the profit motive is pure capitalism. Meaning that you go after economic profit whilst disregarding the rest.
The main difference between profit and the profit motive is that profit is the financial gain that you earn, while profit motive is a mindset to gain more profits.
WHY BUSINESS OWNERS LOVE FRESHBOOKS
SAVE UP TO 553 HOURS EACH YEAR BY USING FRESHBOOKS
SAVE UP TO $7000 IN BILLABLE HOURS EVERY YEAR
OVER 30 MILLION PEOPLE HAVE USED FRESHBOOKS WORLDWIDE