Companies Don’t Exist To Make Money!

Even though shareholders invest in companies to make money, making money is not why companies exist. So, why do companies exist?

All companies have to justify their existence and they do that by satisfying specified needs of their customers. Companies often say they are customer-focused and so they should be. Without customers, companies are nothing but, obviously, if companies don’t make money they won’t be around for long.

For good, sustainable financial returns, in pleasing customers companies must also have efficient processes that are effective in producing the products, evolve as the world changes (proactively preferably) and have good environmental, social & governance processes.

However, companies that focus directly on making money run the risk of acting unethically to maximise their short-term earnings and, hence, managers’ bonuses. When revealed, shareholders’ returns suffer accordingly. There have been and continue to be numerous examples of this.

Unethical behaviour can be difficult to detect but, while not foolproof, critical reading of financial statements can help. If the profit looks too high relative to the the cash flow, it probably is. Profit can be manipulated, cash flow is much more difficult to fiddle.

However, profit is clearly also important as is what capital has been raised and how it’s been used.

Knowing how to read financial statements is a vital skill for all investors, company directors and business managers.

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