Profit maximization

Profit maximization is a key objective for many businesses, focusing on generating the highest possible profit. This approach has both favorable and unfavorable arguments, along with certain drawbacks:

Features of Profit Maximization

1. Cashing per Share Maximization: Profit maximization is often referred to as cashing per share maximization, emphasizing the goal of maximizing the profitability of business operations.
2. Ultimate Aim: The primary aim of any business is to earn a profit, and profit maximization explores various ways to enhance the profitability of the business.
3. Efficiency Measurement: Profit is a crucial parameter for measuring the efficiency of a business concern, providing insights into its overall performance.
4. Risk Reduction: Profit maximization objectives can help reduce the risks associated with the business.

Favourable Arguments for Profit Maximization

Supporters of profit maximization highlight the following points:

(i) Main Aim is Earning Profit: The primary goal of a business is to make a profit.

(ii) Profit as a Parameter: Profit serves as a key parameter for evaluating business operations.

(iii) Risk Reduction: Profit can contribute to lowering the overall risk of a business concern.

(iv) Source of Finance: Profitability is a vital source of finance for a business, enabling it to reinvest and grow.

(v) Meeting Social Needs: Profitability can also meet social needs by contributing to economic growth and employment.

Unfavourable Arguments for Profit Maximization

Critics of profit maximization point out the following concerns:

(i) Exploitation: Pursuing profit maximization can lead to the exploitation of workers and consumers.

(ii) Immoral Practices: It may encourage immoral practices such as corruption and unfair trade practices.

(iii) Inequalities: Profit maximization objectives may result in inequalities among stakeholders, including customers, suppliers, and public shareholders.

Drawbacks of Profit Maximization

Profit maximization objectives have certain drawbacks:

(i) Vagueness: Profit maximization does not define profit precisely, leading to differing opinions about a business's earnings.

(ii) Ignoring Time Value of Money: It doesn't consider the time value of money or the net present value of cash inflows, leading to discrepancies between actual and net present cash flows.

(iii) Ignoring Risk: Profit maximization ignores the risk associated with business operations, both internal and external, which can significantly impact the business's overall performance.

While profit maximization is a common objective, businesses must carefully balance this goal with ethical considerations, societal impacts, and the long-term sustainability of their operations.