Every truck on your street sells lunch. Some of them are businesses and some are expensive hobbies. The difference is one subtraction, and your Daily Report does it for you every evening.
Learning objectives. After this week you can (1) explain how a business creates value and earns a profit; (2) name the four factors of production; and (3) compare the main forms of ownership.
Remember this: revenue is what came in. Profit is what is left after every cost.
1) Value and the profit motive
A business sells goods (a burger) or services (a haircut) that customers will pay for. It creates value when the customer values what they get more than the price, and the price is more than it cost to make. The profit motive, the chance to earn more than you spend, is why an entrepreneur takes the risk of starting a venture. Your truck is a small startup venture.
Profit = Total Revenue − Total Costs
A day with $1,100 of revenue and $980 of costs makes 1,100 − 980 = $120 of profit.
2) The four factors of production
Every business combines land (location and natural resources: your parking spot), labor (people: your crew), capital (tools, equipment and money: the truck and grill) and entrepreneurship (the person who organizes the other three and takes the risk).
3) Forms of ownership
| Form | Pros | Cons |
|---|---|---|
| Sole proprietorship | Easy to start; full control; keep all profit | Unlimited personal liability; hard to raise money |
| Partnership (two or more owners) | Shared skills and money | Shared, often unlimited, liability; possible conflict |
| LLC | Limited liability with pass-through simplicity | More paperwork |
| Corporation | A legal entity separate from its owners; limited liability; easiest to raise large sums | Costly to form; a C corporation faces double taxation |
Owners are not the only ones who care. Stakeholders include customers, employees, owners, suppliers and the community.
Quick self-check
(a) Revenue $900, costs $650: what is the profit? (b) Which factor of production is the truck itself? (c) Which form protects the owners' personal savings without double taxation? (Answers: $250; capital; an LLC.)
Common mistakes
- Calling revenue profit. "We sold a lot" is about revenue; "we made money" is about profit.
- Forgetting liability. A sole proprietor's own savings are on the line for business debts.
- Counting only the owner. Crew, customers and suppliers are stakeholders too.
This week in the arena
Open one Daily Report and find Revenue, Expenses and Net today. Check that revenue minus expenses gives the net. Then match lines to factors: Wages paid is your labor, the district fee in your Fixed costs is rent on land. Write down one day's net; it is your first profit number of the term.