Remember The Emperor’s New Clothes by Hans Christian Andersen about the vain emperor whose purpose in life was to wear elegant clothes and show them off to his lowly subjects? Eventually, two of his subjects carried out a scheme to embarrass him. They duped him into believing they had invented an extraordinary cloth that was invisible only to the stupid and incompetent.

You can see where this is going, right?

The two "tailors" weaved the invisible cloth, cut the air with their scissors, sewed the invisible new suit, and finally presented the new garment to the emperor. Of course, he couldn’t see the suit but didn’t want everyone to think that he was stupid. So, he took off his clothes and proudly put on the invisible garment. None of his servants dared tell the emperor that they couldn’t see the suit for fear that he would think they were stupid. His prime minister organized a parade so the pompous emperor could show off his new clothes. The emperor strutted arrogantly down the street … stark naked. The lowly subjects lining the streets were only complimentary, for nobody wanted to reveal their own ignorance.

Finally, a child in the crowd yelled out, "The emperor is naked!" After the obvious was stated, everyone then admitted that the child was right. Everyone, that is, except the emperor, who refused to admit to his naiveté and stupidity even in the end. I’m not retelling this story because I think that if I write about nakedness I’ll get your
attention … Ventures readers wouldn’t respond to that … right!? Rather, I want to illustrate the point that sometimes the necessities in managing a business become invisible. And usually that invisible necessity is…"profit."

I’ve worked with some companies where talk about profit is only a whispered conversation held in the executive bathroom or at occasional board meetings. In these companies everybody avoids the "P" word and managers are almost apologetic about profit in conversations with employees. But the reality of business is that the "P" word
is a necessity, and the managers of those companies need only be apologetic about the poor job they’ve done in communicating to their employees about the importance of profit.

What is profit? You probably learned in Economics 101 that profit is "the difference between total cost and total revenue". No, duh, you say now that you are an experienced and successful businessperson --- an emperor with a kingdom of your own. But in the real world of business, it’s not that easy. Profit is much more than just the
difference between total cost and total revenue --- it is a result that must be achieved in order to offset the risks of being in business and what the future will bring. Profit covers the risk of innovation and provides a return back to the entrepreneur who has risked invested money, time and effort. Profit supplies capital for tomorrow. It gives you the ability to stay in business. And, it should be the most basic necessity of business and most basic objective of management.

Managers must make a profit to not only be responsible to shareholders, but to all constituents who have a legitimate claim to gain from your business’ existence. You must first make profit so you will be here tomorrow to continue supplying customers with your products and services, and your continued existence is dependent upon your ability to satisfy customers. Next, you must make profit so that your suppliers will be paid for their materials and services. And, you must make profit so that your employees will receive their wages, benefits and job security. And, the local government gets its share of your profits, and the federal government waits until profit has been made … and then takes half. So, it could be said that in a certain way every business, large or small, takes on the form of a trusteeship in society. As a manager you get to utilize raw materials to convert into product, hire employees and deduct their costs from taxes, serve a large network of suppliers who count on you, and provide taxes to the local and federal governments who bank on you earning a profit so that you can help meet their obligations. So if you don’t make a profit, one could conclude that you are only taking from society through raw material, tax deductions, etc., and not contributing back your fair share; therefore, you have no purpose for existence in society.

Okay, you’re probably saying to yourself, so we’ve established that making a profit is a necessity. But how do I balance between profit maximization and other important objectives? I also want my customers to be delighted with my products and services, help my employees be happy and productive, and be a contributor to my
community.

It’s true that achieving profit just for the sake of maximizing profit alone can’t be taken too literally. During the industrial age, common management wisdom was that the maximization of profit was the main goal. Therefore, it was common to hire children, make people work in unsafe and grueling jobs, and imperil the environment.

These outcomes were justified as the sacrifice required to maximize profit. Then, the pendulum swung the other way. "Enlightened" businesses said that satisfied customers were their main goal; that profit was a means to an end. Many authors made a lot of money writing about the social responsibility of business. Many businesses were created with a mission to support worthy causes.

But, sacrificing profit to support other objectives doesn’t always work. Take for example Ben & Jerry’s co-founder Ben Cohen, who created a for-profit company that donated 60% of its profits to save the Amazon rain forest. Cohen also used nuts harvested in the Amazon in its products that were at a much higher cost than other nuts available. Cohen’s company initially grew well, mostly from the high level of publicity it received, but eventually failed and filed for Chapter 11 bankruptcy in 1997. In this case, sacrificing profit for the sake of other objectives was a failed strategy.

Where is the pendulum swinging in today’s information age where dot-com companies with no profits are shaping the future, providing jobs, and fueling the economy’s growth? I’m not sure where it’s going to stop, but I think the correction to the Nasdaq Composite in April gives some indication that assigning high values to companies with no profit doesn’t make sense. And, it’s hard to deny the importance of profit when a company’s stock price can drop 40-60% after announcing that their earning results are going to be below analyst expectations.

If I were a betting man, I’d bet that it’s best to be somewhere near the maximization of profit with a balanced approach to achieving other objectives. Legendary psychologist Abraham Maslow is known for his theory of a "hierarchy of needs" which states that people must first secure the basics of food, clothing, and shelter
before they can handle the other aspects of life. A business’ hierarchy of needs is that it first must secure profit before it can achieve its other objectives. For without profit, a company cannot achieve its other goals or even remain a viable entity into the future. Profit isn’t a just a nice thing you’d like to have happen --- it is something you manage toward. And that’s the naked truth, emperor!