If a business loses money over time, it will likely have to close, putting its employees out of work.
Profit risk is the chance an entrepreneur takes of losing money and time on a business that may not prove profitable. Profit, remember, is the amount of money a business earns and how it pays out for salaries and other expenses. For example, if you were to start a business selling ice cream from a cart in the summer, you would have to pay for the cart rental. You would also have to pay for the ice cream and other materials, and for someone to run the cart while you were away, for example.
After you paid your employee and yourself, paid for the ice cream and materials you used, paid the rent for the cart, and paid your taxes, any money left over would be the profit.
Keep in mind that profit is over and above the money you pay yourself in salary.
You could use any profit to rent or buy a second cart and hire other employees. After a few seasons, you might have a dozen carts employing dozens of workers. Not all enterprises make the same amount of profit. Those that take the most risk may make the most profit. There is high risk in making a new kind of automobile. It’s also risky to open a business in an inner city, because insurance and rent are usually higher than in suburban areas, but reduced competition makes substantial profit possible.
For instance, Irish entrepreneur Denis O’Brien (of Digicel) made billions of dollars selling cell phones in the poorest most violent countries in the world. Big risk can mean big profits. Entrepreneurs such as Sam Walton (Walmart) and Bill Gates (Microsoft) not only became affluent themselves; they also provided employment for many other people – amongst thousands. Walmart is currently the nation’s largest private employer. Taxes also help to keep the environment clean, support people in need, and provide police and fire protection. Businesses and their employees pay taxes that the federal government and local communities use to build hospitals, schools, libraries, playgrounds, roads, and other public facilities!
Moving over to revenues, profits, and losses
Revenue is the total amount of funds a business takes in during a given era/period by selling goods and providing services.
Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses needed to run the operation.
Loss occurs when a business’s expenses are more than its revenues.