December 5, 2022

Small Business Advice

What is the Purpose of Business?

Jerry Osteryoung | 6/16/2008

Painting in watercolor is like walking a tight-rope; one must achieve a perfect balance between what the paint wants to do and what the artist wants to do, or all is lost.
— Mary C. Taylor

When I was in classes getting my Ph.D. in finance, my professors told me over and over, “The purpose of a business is to make money for its owners.” Unfortunately, I cannot tell you how many times I repeated this mantra to my students over the years. Now, however, I have a very different opinion on the subject.

A firm cannot stay in business just to make money for its owners at the exclusion of everything or everyone else. If an entrepreneur takes the attitude that he or she deserves to make all of the money, the business will suffer and will most likely crash and burn. Just consider who stands to lose the most when a business fails.

Some folks — my former professors included — would argue that the owners lose the most since they have the most at risk. There is no question in my mind that entrepreneurs lose a bunch as they generally have the most invested in terms of dollar amount. They are not; however, the ones hurt the most by a business failure. A business closing is devastating to the employees.

Employees are one of the many entities that have a vested interest in a business’ success. In addition to owners, stakeholders such as employees, vendors, banks and customers have so much tied up in a business. They are vitally concerned with the firm’s wellbeing and will put forth much effort to ensure its success. However, success is impossible unless all of the stakeholders are taken care of.

When a business fails all of the stakeholders suffer. Take for example a financial institution. A financial institution risks much of its depositors’ funds to support a business, and if the company fails, its own financial performance suffers.

If employees are not treated reasonably, the whole business will suffer as both the quality and quantity of work declines. So many entrepreneurs forget how important each and every employee is to the success of the business, and they often fail to treat employees well. If the business should fail, these employees are the ones that are going to pay a very high cost.

My colleague and I recently assisted an entrepreneur who had been operating a business with over 50 employees for a very long time. The business was losing hundreds of thousands of dollars each month, and we tried to give the entrepreneur the resources he needed to turn things around. When the situation failed to improve, we realized that there was only one alternative left: he had to close the business and file for bankruptcy.

Telling this entrepreneur that closing the business’ doors was the best course of action was, by far, one of the hardest things I ever had to do in this job. What made it so hard was not that we had to give the entrepreneur this bad news, but because we knew what a loss it would be for all of the stakeholders, particularly the employees. Through no fault of their own, the staff would lose their jobs.

In my opinion, the purpose of a business is to serve the stakeholders. Businesses must earn money to acquire additional funds and assets, but its staff and other stakeholders are vital contributors to this endeavor. The key is to balance and deliver on the needs of all the stakeholders.

Now go out and rethink the real purpose of your business.

You can do this!

Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at jostery@comcast.net or by phone at 850-644-3372.

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