BUSINESS PROFITS AND BUSINESS CAPITAL 1. Reasons for engaging in industry.—The ulti mate purpose of nearly every person who participates in industry is to obtain goods and services with which to satisfy the wants of himself and dependents. In modern society all of these goods and services are to be had directly in exchange for money—using the term "money" to include all media of exchange, in cluding bank notes and bank deposits, or using "money" in the sense in which the term "cash" is cus tomarily used. Hence each industrial participant's immediate purpose is to get as much "cash" as possi ble. The industrial employe sells his services for money. The investor buys stocks and bonds in order that he may have more money in the future than he would have if he hoarded his present stock of money.
The business man strives by buying cheap and sell ing dear, to increase his stock of money. His ulti mate purpose, like that of the employe and the in vestor, is to increase his command of goods and services with which to satisfy his wants; but the means to that end is an increased stock (or flow) of money. He starts with an initial capital, usually consisting of "cash," expends this in the purchase of goods, equip ment, and personal services, and aims to resell these, disguised as a product or service, for a greater amount of cash. This increase in his stock of cash he usually designates as "profit." 2. Example of capital used for profit.—Sup pose that I have a cash fund of $100,000. I may speak of this as an "initial capital" of that amount. If I expend this and get back $150,000 in cash, I am said to have "gained" or "made a profit of" $50,000. What I really have done is to incur a money outgo of $100,000 as the purchase price of a prospective money income of $150,000. This is true whatever be the immediate objects upon I ex pend my cash, and whatever the length of time elaps ing between its expenditure and the receipt of the income. It matters not whether I expend the $100, 000 directly in the purchase of the contractual right to receive $150,000 (as in the case of bonds of $100, 000 value, interest at the rate of 5 per cent which run ten years) ; or in the immediate purchase of goods which I later resell for $150,000; or expend $75,000 in the immediate purchase of goods and $25,000 in the purchase of personal services in handling and selling these goods for $150,000; or expend $25,000 in the purchase of raw materials, and $10,000 for water and fuel and $40,000 for machinery, all of which are used up in converting the raw materials into "finished" ar ticles, and $25,000 for personal services in converting the materials into finished articles and selling them for $150,000. In all of these cases the real purpose of the
cash outlay is to obtain the cash income and the cash outlay is properly to be regarded as the purchase price of the cash income which results (whether this is more or less than was anticipated). In each case, there is a "profit" of $50,000, which consists of an increase or "gain" in my capital.
The $150,000 of cash income may not all be re ceived at one time, however, but may be spread over many months or years. There can be no definite as certainment of the amount of profit until the venture is completed and the $150,000 collected. Yet I may wish to form a judgment as to the profitableness of my venture up to any point of time between its com mencement and its completion, and of its profitable ness during any given month or year. This I can do with satisfaction to myself by identifying the unsold goods and unused equipment at any point of time with cash outlay which was their purchase price.
A. Thus assume that on January 1st, 1916, I ex pend $100,000 in the purchase of loom* units of certain goods which I resell for $150,000, $60,000 of which is received for 40,000 units during January, 1916, and $90,000 for 60,000 units during February, 1916. Altogether I have made a profit of $50,000 on the venture in the two months. Identifying $40, 000 of the initial outlay with the 40,000 units sold during January and $60,000 of it with the goods sold during February but still in my possession January 31st, I am able to say that the $60,000 of money in come received during January cost me $40,000 and represented a profit of $20,000 and that the $90,000 of money income received during February cost me $60,000 and represented a profit of $30,000.