INTEREST 23 



this rate of interest, which represents the possible income on 

 capital in the form of money, becomes the standard by which 

 the desirability of any other form of investment is gauged. 



39. The Profits of the Undertaking. Unless there is a 

 chance of earning a larger rate of income upon the capital re- 

 quired in an undertaking than could be earned by lending this 

 capital to others, there would be no incentive to assume the 

 risks of the business. In order to make a business really profit- 

 able, the net income should exceed this "rate of interest." 

 This surplus is the goal of the whole operation and is termed the 

 "profits of the undertaking," as distinct from the term "profits," 

 which includes interest ( 33) . It is the personal reward of the 

 individual who has borne the responsibility of the business. 

 There is no good English word to indicate this person. Un- 

 fortunately we have appropriated the word "undertaker " for 

 other uses. The French term "entrepreneur" is commonly 

 accepted by economists. The more recent English substitute 

 "enterpriser " is rather clumsy, but will be used in this text. 



The term "profits of the undertaking " would therefore ex- 

 clude interest as a necessary "cost" and regard the margin 

 remaining as the real profit. 



40. Annual Profits. On this basis, a business paying annual 

 dividends is considered successful if the average dividends are 

 larger than the rate of interest which the firm has to pay on 

 borrowed capital. If the dividends are less than this, the busi- 

 ness is considered unprofitable to the owner, although it may be 

 relatively more profitable to continue it than to abandon or sell 

 it, with resultant loss or impairment of capital. As a matter of 

 fact, only the more capable and experienced managers succeed 

 in earning an "enterpriser's profit," and one per cent of independ- 

 ent concerns annually become insolvent, thus failing to earn a 

 net income sufficient even to protect the capital investment.* 



41. Deferred Profits. In an enterprise in which outlay 

 precedes income by an interval greater than one year, the method 

 of accounting for profits depends upon whether this condition 



* The Percentage of Failures, Dun's Review, May 31, 1913. R. S. Dun & Co., 

 New York. 



