Why profit maximization is not an appropriate goal

You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Therefore, profit maximization is considered to be a basic criterion for financial decision-making.

However, this goal is not appropriate on the following grounds;. Profit is a vague term. For example, the term profit may mean long-term profit or short-term profit, profit after tax or profit before tax, gross profit or net profit, earning per share, return on equity etc.

So if profit maximization is taken as a goal of the firm, there will be confusing in decision-making. Merely issuing shares and using the proceeds in the treasury bill can maximize the amount of profit. However, this would result in a decrease in earnings per share EPS.

This goal is not clear whether the financial manager should take such to step to maximize the profit. Benefits received in earlier periods are valuable than those received in the later period. Open Access only. Financial management pursues two sorts of goals-profit maximization and wealth maximization. One is concerned with earning profits, whereas the other is concerned with adding value. Wealth maximization overcomes all the limitations that profit maximization possesses.

In the short term, profit maximization may pursue such action which might be proved harmful in the long run. On the other hand, wealth maximization might not seem beneficial in the short run, but in the long run-this purpose fulfills the goal of shareholders that is add value.

So, whenever there is a comparison, profit maximization is inferior to wealth maximization. Profit maximization does not take into consideration, the interest of share holders or stake holders, who ought to be the ultimate beneficiaries. Mere price versus output calculations make firms to operate in a profitable manner, but it should never be the only objective of a firm, as it has the moral and social responsibility to patronize its shareholders by increasing the net worth of the company.

While maximizing profit, a firm either produces maximum output for a given amount of input, or uses minimum input for producing a given output. Thus the underlying logic for profit maximization is efficiency.

Under perfect competitive market conditions, profit serves as a perfect measure for the performance of a firm.