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In this part of the country, it seems that profit has become a dirty word. The private sector has been demonized by politicians and union leaders as being greedy in its search of profits. This is perhaps not so surprising in a region with a high dependence on government and social programs, transfer payments and handouts.
The role of profits in our economy is not well understood. Too many people believe that business owners make too much profit at the expense of consumers. For most small and medium-sized enterprises in Atlantic Canada, which account for more than 80 per cent of the businesses in the region, profit margins are modest. Indeed, in a normal economic environment, profitability for the majority are likely to be less than 10 per cent. In the current environment, there is little profitability at all.
Reasonable to Expect a Return on Business Investment
Just as you as an individual expect a return on your investments, whether savings accounts or RRSPs or equities, business owners expect a return on their investments in their companies. Most work longer hours than average and pay themselves appropriately for the size of their businesses.
Contrary to popular opinion, the vast majority of business owners do not pocket all the profit earned in any given year. To do so would impinge on their ability to survive or grow their businesses. To be successful in business over time, there is a need to innovate, evolve and keep current with technology and equipment needed to operate a business. This requires further investment in the business and the capital for that investment is available from only two sources: outside financing and profits.
Profits Benefit Employees
Profitability also provides companies the ability to invest in employees, especially in terms of wage increases and bonuses. In the company I previously owned, 25 per cent of pre-tax profits were set aside for employee performance bonuses each year. While profitability varied year to year, this profit sharing was conducted every year for 30 years.
The philosophy was simple. Employees, based on their individual contributions, should share in the success of the company. Every employee, regardless of position or level of responsibility, participated in this performance bonus program.
In most years, only about a third of the profit was distributed to the owners as dividends. The rest was reinvested into the company. This included creating a strong balance sheet with sufficient cash reserves to ride out short-term challenges faced by the business.
Not every small and medium-sized business has the luxury of such a reinvestment of profits due to thin margins. In the restaurant business, for example, margins are low, often four to five per cent. This does not leave a lot for owners, employees or the business itself.
The private sector operates in a competitive environment. This is good for the consumer because it leads to price competition, new product development and improved levels of customer service. Competition leads to innovation, and innovation requires capital reinvestment in the business. That is the nature of competition.
In my former business, my mantra was always “better today than yesterday, better tomorrow than today” in terms of looking at our products and services. It perhaps helps explain the longevity of my former business (40 years at the time of the sale and still going).
There are often complaints about the level of remuneration of CEOs in Canada. Some of these complaints are justified, particularly for the larger, public-traded companies in Canada. The level of compensation, when bonuses and stock options are included, are unjustified in many of these cases. Indeed, the ordinary shareholders are not being protected by their boards of directors.
In my opinion, the percentage of CEOs in this category is very small. Most small-business owners are not unfairly compensated for their efforts and the public should not lump them with larger, publicly traded companies in this regard.
Community Benefits as Well
Being profitable also allows companies the opportunity to fulfill their social responsibilities in the communities where they operate. Having participated in numerous fundraising campaigns over the past 30 years, I can attest to the generosity of the private sector in this region. In a small region like Atlantic Canada, there is a limited number of companies that have the ability to support their communities through philanthropic efforts. The private sector does not get enough credit in this regard.
Unlike the public sector, businesses are always at risk from economic turbulence, whether it is the aftermath of 9-11, the long recovery from the Great Recession of 2009 or the coronavirus shutdown. Jobs are lost, profits disappear. The public sector usually does not lose wages, or jobs or benefits during such times.
Profits are not a dirty word but are what is required for the private sector to grow and support the economy.