The advantages of profit maximization is that it creates a cash flow and therefore investors become interested in companies that are maximizing their profits. It is one of the core objectives of a business organization.
Profit maximization is the most important objective of a business entity. Every business, in addition to striving for the attainment of other objectives, does its best with special importance to make profits. Profit is to be regarded as a yardstick against which are assessed or measured the quality and value and the success of a business.
Profit in general is the money that a business makes when it sells something for more than it paid for it. It is the income from an investment or transaction. In accordance with one of the financial statements, the income statement, also called as Profit and loss statement, profit is the excess of income over expenditure being referred to financial gain. Additionally, the term, net income, which is used in the aforesaid financial statement, is the amount that remains when nothing more is to be taken away (after tax has been paid).
As has been mentioned above, profit maximization is the most important objective of a business entity as it helps to run a business smoothly and successfully and survive continuously while making profits and staying solvent at the same time as providing various benefits. Some of the merits of profit maximization are mentioned hereunder:
Considering the merits of profit maximization, more than anything else, the first and foremost benefit from the objective of profit maximization is that the profit becomes a benchmark against which the efficiency and the success of a business are to be judged so as to take necessary steps for the enhancement of profits in case there is no profit generation in a business entity.
On the basis of evidences showing the failure of various businesses, it thus may be rightly said that a business without profit maximization cannot survive.
Even though, at the initial stages, some businesses try to maintain their working capital, but since there are no constant measures towards the profit maximization, the situation eventually compels to close down the business. Hence, profit maximization is the basic objective of any business to survive and to remain in the money.
It is to be noted that the business that generates high level of profitability will not only gather sufficient funds to be employed for the business expansions or new business avenues but also increases the return of its shareholders.
Every business needs to maintain sufficient funds for its day-to-day requirements while safeguarding the business against the possibility of insolvency. Moreover, there are times when some contingencies or unseen emergencies arise that may necessitate the money to be set aside. The business must be prepared for it. Hence, the term working capital refers to the excess of the current assets over the current liabilities is very much useful in this way. Thus a business which fulfills the objective from the perspective of profit maximization, can maintain sufficient funds at all times while maintaining working capital effectively and efficiently.
If a business does not generate profits it is as though no business is being done. As David Stout points out, “Money is very tight right now….. You can’t go to a bank and ask for a commercial loan if you don’t have a business to show them, no profit and loss statements because you are not doing any business.”
To Sum up, striving towards the fulfillment of the objective of profit maximization is leading the business organization in the direction of profitability and prosperity while safeguarding against the possibility of insolvency. If a business wills itself to stay in this dynamic world must not be static with no thought of profit maximization, but must be moving ahead strengthening the objective of profit maximization while applying special plans and objectives and strategies.
Unlike law, where extreme emphasis is placed on defining a word for the purpose of a given statute, words are often used somewhat loosely in other faculties, including economics. This is one of the reasons why many experts tend to use words like value, price and cost somewhat interchangeably, as if they relate to the same thing.
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