In this article, You’re going to know about profit maximization, limitations of profit maximization and Disadvantages of profit maximization.
What is the profit maximization of a firm?
Profit maximization is the main purpose of any business. Therefore, it is also the purpose of financial management. Profit maximization in financial management represents the process by which profits in earnings per share (EPS) increased. In simple words, all decisions should focus on maximizing profits. Whether it’s investment or financing to maximize profits.
Profit maximization is the primary purpose of the traditional approach and financial management. It implies that every decision related to the business evaluated in the light of profit. Regarding all projects, acquisition of assets, raising of capital, etc. for new projects. Their studies on profits and profitability are studied. If the outcome of a decision has a positive effect on the benefit. Then the decision should take forward for implementation. In the next paragraph you read. The limitations of profit maximization.
Limitations of Profit Maximization
Long term long term goal
Profit maximization can be one of the top goals of financial management, but this kind of practice does not mean that an increase in short-term profits will help the company to form long-term sustainable goals. While there is the potential to bring in extra money in short-term in maximizing profit in financial management. There can be a huge reduction in long-term earnings.
Reducing the quality of production for the sake of increased profits will harm your brand. Annoy customers, and allow competitors to steal your business. For example, if your organization decides to unload all the available inventory for an available customer. Then you are separating only loyal customers who have spent more time over time. When it comes to maximizing profit in financial management, it is important to understand. Whether your short-term profit maximization efforts will achieve long-term sustainable goals.
Another limitations of profit maximization in financial management are the ability to reduce product quality. Earning more profits can be one of the goals of financial management. But cutting corners, using low-quality materials, and avoiding the company’s value to earn high profits will affect the reputation of the company and potentially will lose customers.
It is easy to force your employees to work without any increment or use environmentally harmful products to cut corners and maximize profits. But cutting corners can ruin your brand reputation and give company The best way to fail is to While profit maximization is a major goal of financial management, it is best to cut corners or not compromise on company values to earn some extra money, which can afford your customers and business.
A great way to reach the maximum benefits in financial management is to cut employee training or research and development budget. Although this will reduce operational costs, and maximize short-term profits. It will not help the company to reach any long-term sustainable goals and potentially harm the employees. Employee training is necessary to maintain long-term benefits to any company while creating happy employees. Without a satisfying workforce, your company will fail and no corner cut bones will be worth it to maximize profits.
There are many goals of financial management with profit management which is a top priority. It is important to understand. However, focusing only on maximum profits will result in business turmoil. It can completely damage employees, customers, and businesses. The best way to successfully reach maximization in financial management is to focus more on company integrity.
Minimum Cost Price
Increasing sales price with the minimum value in the maximum benefit is the process maximization. The main purpose of the business is to maximize your profit with an effective cost of production. Advantage maximization increases your turnover and gives more confidence to take risks. Risk-Return Award Company profits on the basis of an exact decision or exact prediction for the company The proper market information is required to make the final decision. limitations of profit maximization.
While reducing your maximum earnings, you have the potential to bring the maximum benefit to additional funds in the short term. If you dedicate most of your resources to satisfy a demanding client, who wants all your inventory right now, then you risk the separation of loyal, long-term customers who are not in demand but Can spend more with it.
Steam of Cash Flow
The extent of profit maximization argues that it ignores the risk associated with the project’s cash flow stream. For example, the total profit from the two projects can be similar, but profit from one project can be widely fluctuated compared to other projects. Large fluctuating firm in profit is risky. This fact is ignored for the purpose of maximizing profit. This is the Limitations of profit maximization.
Risk And Reward
Running a business comes risks and, the more you aim to earn, the more risk you take. To increase sales in retail stores and get maximum profit, you should stock inventory. And invest in marketing to get customers at the door. However, it is always impossible to accurately predict demand. So you can end up with a glow of those things that nobody really wants. To reduce the profit that you were trying to maximize. Read Disadvantages of profit maximization.
Ignore Time value in money
The profit maximization formula simply states that “more profit is better to offer”. In essence, it is considering naked benefits without considering their time. Another important dictator of finance says. “One dollar is not equal to one dollar a year later”. So, the time value of money is completely ignored. Alternatively, we can say that it ignores the patterns of cash flows.
The decision based solely on profit maximization model will decide in favor of profit. In the pursuit of profits, the risk involved is ignored. Which can prove to be ineffective at times, Because high risk directly questions the existence of a business? Between Project A and B, Project A can be more profitable. But it can be better if it is quite risky compared to Project B.
The most problematic aspect of profit maximization as an objective, it ignores intangible benefits. Like quality, image, technical progress, etc. The contribution of intangible assets in creating value for a business is not worth the overlook. They indirectly make assets for the organization.
Disadvantages of profit maximization. The importance of losing profit maximization is not unfounded. It is not just because it ignores the value of certain important areas such as risk, quality and wealth at the time of wealth. Rather than the excellence of money maximization in the form of financial management, there is also a reason.