What Is Profit Maximization
It is a process where a company tries to maximize its profit with the available resources. The share holders want to increase their profit every year, so they need to be competitive in the industry by using what is available in making maximum profits. This puts enormous burden on the administration of the company.
For profits to increase the organization must find new techniques and methodology. This helps the firm to earn more income during a given period of time. Some of the profit maximization techniques include:
- Cost minimization: the organization should look into costs and plan there usage accordingly with minimum cost involved. It is only then that profits can be maximized with minimum costs.
- Waste management: the firm can chalk out a waste management routine by making a policy of clean desk once every week etc.
- Labor force reduction: it can cut down unwanted labor force by automating the process where ever necessary. This also helps in cutting down labor costs.
- Even organization structure: instead of having too many hierarchy levels which is complicated, the firm can have an even structure that will help employees to understand better whom they should report to.
- Exploring new markets: the firm can plan to enter new markets to produce different products. This helps the firms to compete with others who are in the same line of business thereby absorbing new customers.
The main assumption of Profit Maximum is that the firm’s behavior is rational. Profit maximization always stresses on cash flows rather than profits. That is because if there is cash flow only then the firm can generate profit. Profit maximization is a very old approach, now a day it is termed as Wealth Maximization. This term actually gives a long term prospect for assessing the business in various fields.
Every business looks for short term benefits. This short term prospect can satisfy the objective of earning profit but not creation of wealth. Because creation of wealth needs longer time prospects. Therefore today company’s stress on wealth maximization rather than profit maximization. This has made the company to understand that profit should not only be the main objective for them, but it has to think on other aspects as well. For example accelerating the sales, entering new markets, extending new product line etc.
Hence today’s managers insist on utilizing the modern approach of wealth rather than the profit maximization. Since profit is a subdivision of wealth and being a subdivision, it will very well help in creation of wealth. This helps in accurate assessment of business since the modern approach gives prominence to cash flows instead of profitability.