What are the limitations of the goal of Profit Maximization?

The objective of making profit is a commercial imperative. Profit generation is essential for survival and growth of the business. Profit generation is also regarded as a measure of success of the business. Profit is an important yardstick for measuring the economic efficiency of any firm. Any business would be making the use of economic and human resources available to generate profits. The cost of these resources is required to be met from the revenue generated from the use of these resources and the surplus remaining would be needed for the growth and expansion of the company. It is only an efficiently run business which can afford to meet the cost of resources and generate profits. Therefore, the survival and growth of any business depends upon its ability in earnings profits. It is therefore contended that profit maximization is one of the primary goals of the organization without which the survival of the organization itself is threatened.

Although profit is an important yardstick for measuring the economic efficiency of any firm, yet it has got certain limitations which are listed below:

1. It ignores the risk which is associated with the investment in such profitable ventures. It ignores the risk or uncertainly of expected returns or benefits. Risk is defined as the chance that the actual outcome of a decision may differ from the expected outcome and in finance; risk investment is one whose potential returns are expected to have a high degree of variation or volatility. Some with an investment with high profits potential but having a high degree of risk. When profit maximization is aimed as the main objective, all profitable investment projects are accepted without having regard to the risk factor. An investment may have profit potential but may not be worth the risk.

2. The objective of profit-maximization assumes the existence of perfect market conditions in which various resources are efficiently managed. However, modern markets suffer from many imperfections. It leads to inequitable distribution of income and wealth.

3. It ignores the time value of money without having any regard to the timings of costs and returns. It takes into account only the size of the profits without considering the timings of the prospective earnings.

4. Profit maximization as an objective is considered to be vague and ambiguous. It does not define adequately as to what profits are, what profits to be considered, whether from the point of view of funds employed or from the shareholders point of view, or short term or long term profits etc.

5. Profit maximization as an objective ignores other important aspects of financing e.g. borrowing capacity etc.

6. The objective of profit maximization focuses on interests of the owners alone and ignores the interest of other interested parties such as employees, consumers, government and society in general.

7. The perception of the management as regards profit maximization substantially differs from the perception of the shareholders.

Another variant of profit maximization is to consider the rate of return on investment. If the rate of return on investment is higher than the cost of funds, then such investment opportunities can be undertaken.

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