Profit Maximization objective of Financial Management

Profit Maximization is implied objective of any business activity. Every business activity is started with the ultimate aim of making profit. Profit maximization objective of financial management means that all financial decisions are made with a view to maximize profit of the firm with all its investments and savings. This objective helps in measurement of economic performance and efficiency of any business concern.

 Arguments in favor of profit Maximization objective

  1. Rationality: It is rational that every business activity is undertaken to earn maximum profit.
  2. It ensures effective utilization of resources: To maximize profits, optimum utilization of limited resources is ensured and  costs are reduced to minimum.
  3. It measures success of business decisions and operations: whether the implemented decisions were good or bad, whether the business operations were efficient or not, such things could be known with the help of amount of profit earned.
  4. Profit is the main source of finance: Fund is needed to carry out business operations, for expansion and diversification etc. So, for such purposes, retained part of profits could be used.
  5. Maximization of social benefit: A business enterprise could fulfill social responsibility obligations in the form of social activities like health, education etc. it is possible only when the enterprise earns maximum profits.
  6. Profit reduces risk of business: The future is uncertain. There are many risks involved in running a business, if a firm has sufficient profits, it could cope with such risks.

Unfavorable Arguments  for Profit Maximization Objective

  1. It is Vague and ambiguous: The term profit is not clear. It has not been defined precisely and accurately. Whether it is Profit after tax or before tax, accounting profit or incremental profit etc.
  2. It ignores time value of money: It is based on the concept of “bigger is better” which means higher benefit is better  for firm. But it does not consider the time period of occurrence of the benefit. It is incorrect to treat cash inflows occurring at different point of time as the same.
  3. It ignores risk factor: there are many internal as well as external risks involved which is not taken into consideration in profit maximization objective.
  4. It leads to exploitation of workers and consumer: To earn more profit an enterprise tries to charge more price for its products and exploit workers by taking more work at fewer pays.
  5. It leads to unethical, corrupt, unfair trade practices.