Factors Affecting Goodwill

Goodwill is the value of a firm’s reputation and its good brand name in the market. A firm earns goodwill through its hard work. Goodwill helps a firm in winning the trust and faith of the customers by fulfilling their demands in both qualitative and quantitative aspects. It can be said that the goodwill of a firm is a result of the past efforts made by it which helps a firm to earn higher profits in present and in the future as well. In other words, positive goodwill helps a firm to earn supernormal profits as compared to the other firms that earn only normal profits. Goodwill is considered an intangible asset of the firm. It means it cannot be seen or touched like other assets of the firm. It plays a very crucial role for any firm to survive and compete in the market. The following are the important factors affecting the goodwill of a firm.

Factors Affecting Goodwill

The following are the important factors affecting the goodwill of a firm.

Quality Products: One of the important factors that affect the goodwill of the firm is the quality of the product. Quality product means producing the right and standard featured products and selling them at reasonable prices. A firm that is engaged in producing high-quality goods and services is able to capture the huge demand for its product in the market. This will in turn help the firm to increase its goodwill in the market.

Location: The goodwill of a firm largely depends upon the place where the business of a firm is located. If the business is located at a convenient and easily accessible place, then large numbers of customers get attracted which in turn leads to an increase in sales. It helps the firm to earn higher goodwill.

Management: Efficient management helps the firm to fulfill its customer requirements. It also helps the firm to achieve higher productivity along with cost-efficiency. It means efficient management helps in producing superior quality goods and services at lower costs, which in turn lowers the prices of goods and services in the market as compared to the other firms. Due to this, the firm will be able to earn higher profits resulting in a higher value of goodwill of the firm.

Firm’s Status in the Market: The status of a firm in the market also affects its goodwill. A firm that is not facing huge competition in the market or enjoys the status of monopoly in the market will be able to earn higher profits. This will result in an increase in the value of the goodwill.

Economies of Scales: A firm that enjoys special advantages such as the continuous and easy supply of power, fuel, raw materials, etc., at a reasonable price and producing quality products at a large scale is able to enhance the goodwill of the firm.

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