Per Merriam-Webster, profit has five definitions, one of which is the compensation accruing to entrepreneurs for the assumption of risk in business enterprise as distinguished from wages or rent.
This definition is important to grasp and apply. In short, profit is reward for risk.
Business owners are reminded daily there are no guarantees, and that every transaction, customer, employee, supplier, relationship, etc. has risks. We only take these risks in the belief that we’ll be rewarded more than our expenditures, which makes sense.
In theory, the greater the risk, the greater the reward. That’s why some consumers pay higher credit card rates than others. If your payment history shows a pattern of late or non-payments, your interest rate is higher. Healthcare and car insurance premiums vary widely from one person to another, because not all transactions carry the same risk.
The irony is small business owners are closer to the marketplace and understand the risks of individual transactions better than larger, less-connected competitors. Yet, we often fail to use this insight in our business-making decisions.