Profit maximisation

Profit maximisation is a process business firms undergo to ensure the best output and price levels are achieved in order to maximise its returns.

Influential factors such as sale price, production cost and output levels are adjusted by the firm as a way of realising its profit goals.

In business, profit maximisation is a good thing, but it can be a bad thing for the client if, for example, lower-quality materials and labour are used or if the business decides to raise the prices for executing projects, all in pursuit of profit maximisation.

Let’s now explore some of its advantages and disadvantages.

Advantages of profit maximisation

• Economic survival: Profit is vital for the survival of any business

• Measurement standard: Profits are the right measurement of the viability of a business model. In the absence of profits, the business loses its key goal and incurs a direct risk to its survival.

• Social and economic welfare: In a business, profits demonstrate proficient use and allotment of resources. Resource allocation and payments for land, labour, capital and the organisation lends itself to social and economic welfare.

Disadvantages of profit maximisation

• ‘Profit’ definition is unclear: Different perceptions of the term exist among organisations and individuals. For example, profit can be the gross profit, net profit, before tax profit or the profit rate.

• Time value of money is ignored: The formula is based on the idea that the higher the profit, the better the proposal, but what about its timing? In finance, when considering present value, we know that cash now won’t have the same value in the future.

• Attention not paid to risk: In the pursuit of profit, risks involved are ignored, which may prove unaffordable at times, simply because higher risk directly questions the survival of a business.

• Ignores quality: The most challenging part of profit maximisation as a goal is that it neglects the intangible benefits such as quality, image, technological advancements etc. However, the input of intangible assets in generating value for a business is not worth neglecting, as they indirectly create assets for the organisation.

Your task

Draw from your experiences regarding any work you had to make adjustments to in order to maximise profit. What were the reasons for profit maximisation in the work you undertook?

Share your thoughts with your fellow learners.