Merits of Profit maximisation

Profit maximisation has been considered to be the most important business objective for the following reasons:

1. It is rational to accept profit as a standard for measuring the success of efficiency of a business enterprise.

2. It is difficult to survive without profit maximisation.

3. Even for the attainment of socio economic welfare profit maximisation has to be achieved.

4. A business with -a high level of profitability will generate a high level of funds, out of which it can provide for expansion in addition to a substantial and increasing return to its shareholders.

5. In the absence of profit, business activity would remain at a static level. A firm can not afford to do so because a business has always to function in a dynamic world.

WEAKNESSES:

This approach of profit maximisation has its own shortcomings.

1. It is an incomplete concept. It does not identify which returns are to be focussed on.

2. It gives no guide on levels of risk and uncertainty that might appropriately be accepted along with the profit forecast. It is not possible to maximise what cannot be known.

3. This approach is completely silent on the timing of profits to be maximised. It does not tell the management whether it is worth waiting for.

4. It is a narrow concept which does not take into account the interests of other interested parties in the prosperity of the concern such as government and workers etc.

LIQUIDITY vs PROFITABILITY | MAXIMISATION OF RETURN | WEALTH MAXIMISATION | Constraints - Policy Decisions - Profitability | IMPLICATIONS OF WEALTH MAXIMISATION | Suppliers of Loan Capital | RELEVANCE OF WEALTH MAXIMISATION | Retaining earning and Undistributed profits | Managerial finance function | Functions of Financial Management | FINANCIAL FORECASTING | MANAGEMENT OF CORPORATION ASSET STRUCTURE | THE MANAGEMENT OF INCOME | MANAGEMENT OF CASH | DECIDING OUT NEW SOURCES OF FINANCE | CONTACT AND CARRY NEGOTIATIONS FOR NEW FINANCING | ANALYSIS AND APPRAISAL OF FINANCIAL PERFORMANCE | INCIDENTAL OR ROUTINE FUNCTIONS | CAPITAL BUDGETING DECISION | CURRENT ASSET MANAGEMENT | Maximisation of Share Value | RESPONSIBILITIES OF FINANCIAL MANAGEMENT IN THE FIRM | Functions of the Treasurer and Controller | TASKS OF FINANCIAL MANAGEMENT | CHALLENGES OF FINANCIAL MANAGEMENT | Gross and Net Savings | Household Savings | How to politely win when credit disputes and problems arise