What is the Purpose of a Small Business?

It's anything the owner chooses it to be. It's also to maximize profits.

In a 1970 New York Times essay, Milton Friedman, the author of Capitalism and Freedom, argued that the social responsibility of business is to increase its profits, specifically “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” The idea that “business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends” was a “fundamentally subversive doctrine” in a free society, because it empowered corporate executives to impose a “tax” on investors and spend the proceeds on social programs of their choosing, a power that we grant only to government.

Friedman writes, “In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Once the money is made and distributed to shareholders, they, as individuals or through freely-formed groups of individuals, can pursue “desirable social ends” of their choosing, rather than having the choice imposed on them by their agents (corporate executives) or by an activist group of fellow investors.

Friedman draws a distinction, however, between the corporate executive (an agent) and the individual proprietor, a business owner. Both are tasked with determining how to deploy their company’s resources and what ends to pursue. But, “The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his ‘social responsibility,’ he is spending his own money, not someone else's. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so.”

What’s the purpose of a small business?

It’s whatever purpose the business’s owners decide. It could be to generate and build wealth, it could be to disrupt an industry, to fund a lifestyle, escape the rat race, provide an income when there are no (good) employment options, provide for a family; it could be to give back to the community, to express a very individual perspective, to create something that makes one small part of the world a little better. It could be several of these at once, or some entirely different thing. The owner has control. There may be as many answers to the purpose question in the small business context as there are small businesses.

That’s one view, and I agree with it. Because it’s the details of a story that matter, and the details are always different. But, on another view, stories as a whole are not that different. They have types. In small business, there are three primary story types: the story of success (Paradiso), the story of failure (Inferno), and the story of survival (Purgatorio). As a small business entrepreneur, you win or you lose or you survive. However, because you’re the one playing the game, you get to make quite a few of the rules, including the rule that you get to decide what to make of it all and how you feel about it. You can tell yourself anything.

You also can’t. If you showed me all of your annual financial statements from Year One to now (or when you walked away), I’d be able to tell you if your business prospered, failed, or struggled. However you’ve chosen to process the time, effort, and resources you put into the experience relative to what you got out, ball don’t lie. It’s simple arithmetic, and you know it. You were running the numbers yourself in your head every day.

This is what makes small business so interesting and so stark. The shape of each of the three different outcomes (success, failure, survival) look the same in the financial statements and are therefore easy to recognize. What those shapes contain, the individual highs and lows, is always different, but the three shapes themselves stay consistent. A successful business generates profits and either retains those profits to grow and expand or it distributes those profits to the owners to allow them to grow their personal wealth. A business that doesn’t do this, whatever else it may be, it’s not a financial success. It doesn’t stand on its own. It has to be propped up or subsidized somehow.

As a small business entrepreneur, if you believe, as per the Friedman model, that your business’s purpose is to “increase its profits” and thereby maximize shareholder value (i.e., your wealth), you’ll keep score by your financial statements. You’ll figure out what needs work and work on it until it’s in line with your expectations. If you choose a purpose other than profit maximization for your business, you’ll keep score another way. You may look at your financial statements at tax time, scan through the numbers. They looks the same, a little better or a little worse. There’s no sign of planning or purpose, no sense that the numbers reflect your intent. You nod, sign, and get back to work on your non-financial purpose.

But what’s wrong with pursuing that other more important purpose while still building the conventionally successful profit-maximizing business, keeping two different scores? Why choose a purpose that precludes financial success? Why choose a for-profit business to pursue a purpose that’s in conflict with profit? How can a small business that doesn’t generate profit continue to operate without damaging someone’s financial well-being (almost certainly your own)?

That seems upside down to me, the idea that a business owner’s reasons for starting a business don’t allow for the owner to achieve financial success. I completely understand how to arrive at that kind of hopeless just can’t win feeling, but I don’t understand how to start with an “I don’t care about winning” feeling. It seems to call for a heroic level of self-sacrifice. Is anyone still capable of that? Would we call it a good thing?

I don’t think so. I think whatever other purpose may be driving an entrepreneur, every entrepreneur also wants their business to succeed in pure financial terms. The success doesn’t have to be earth-shattering or life-changing, but it has to be felt: a wide enough margin of safety to produce a sense of calm, stability, and hope. Success in pure financial terms starts with profits and increases with increasing profits. So, really, the purpose of a small business is not so different from Friedman’s view of the responsibility of a big business.

What’s a wonderful life?

In Frank Capra’s It’s a Wonderful Life, George Bailey, his sputtering, struggling building and loan business about to finally implode and ruin him and his family, finds himself in the town bar feeling exactly that hopeless just can’t win feeling I mentioned earlier. He fingers the life insurance policy in his coat pocket and questions the meaning and purpose of his disappointing, unsuccessful life.

The movie goes on to show us and George that he’s mistaken. His life had, has both meaning and purpose; the dreams he gave up to keep the family business alive allowed the people of the town, his neighbors, to build their own lives, to realize their own dreams. The world, had he never existed, would have been a much worse place. His heroic self-sacrifice (heroic because he’s no saint, everything that doesn’t go his way hurts him; he doesn’t rage; he just gets used to it) meant something, led to something.

I think George Bailey would be front and center as an example of a businessman who illustrates “business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends.” Except it’s all unintentional. George isn’t that guy. He wants to travel the world. He wants to live. He wants a good life. He wants to make a name for himself out there. Instead, he gets stuck in his piddly hometown, running a family business that does no better than survive, forget profit. Why? He can’t say no. He can’t help himself. It’s who he is. He’s a good person who puts others and a sense of duty ahead of his own interests.

He never wanted to be a businessman. He has no knack for it. He doesn’t belong, and he doesn’t engage. He mopes. The business spins its wheels, goes nowhere. He trusts and is done in by his infuriatingly inept employee, Uncle Billy, who absentmindedly loses a daily bank deposit. The evil banker Mr. Potter (evil not because he’s profit seeking but because he’s compromised in his ethics and basic humanity — he inadvertently takes the deposit from Billy and then, seeing what he has, decides to keep it and force the building and loan into bankruptcy) mocks and takes advantage of George’s lack of competence as a businessman when George approaches him for a loan. As do his neighbors, they mock in their way. They don’t allow George to earn a reasonable profit for the service he provides. As customers, they’re happy to capture most of the value of the transactions they have with him. (Sure, they redeem themselves in the glorious finale by arriving in bunches to help recapitalize the building and loan, but still…) Most people in George’s life are, really, happy to take, too oblivious to give. Exchanges don’t seem fair, and I’m not convinced George feels free to decline them.

I love the movie. So much going on. It’s one of my favorites. But it’s tough. It hurts. Every time I watch it, it’s like: Come on, George, get it together; get after it! But he has his arc. He has his revelation. He’s saved. And I’m always moved.

I’m just not sure a life in business can be at all wonderful without purpose and profit.