The company must take the investment and the decisions of financing on a basis of continuation. To take the wise optimum and the decision, a clear arrangement of the objectives is a need. There are two approaches broad-discussed concerning objectives financial management. One is approach of maximization of benefit and second is approach of maximization of richness.
In this article we are discussing Profit Maximization Approach
The objectives are employed in the direction of a criterion of goal or decision for the decision implied in financial management.
Profit maximization approach
The economists believes that one long period that the maximum benefit of income is the single goal of any organization of businesses, because that will also lead to the optimum allocation of resources. Actions which increase the benefit of companies are undertaken and those which decrease the benefit are avoided. Thus, of the prospect for the economic theory, the maximization of benefit is simple a criterion of economic efficiency. There is also an extensive agreement which under the perfect competition, where all the prices reflect true values exactly and consume them are quite informed, benefit maximizing the behavior by companies leads to the effective allocation of resources and the maximum good social being.
The rationale behind profit maximization objectives is simple. A business firm is s profit seeking organization. Profit is a test of economic efficiency, It is assumed to lead to efficient allocation of resources, It ensure maximum social welfare
Limitation of profit maximization objectives
The concept of the benefit is vague
The definition of the benefit of limit is vague and ambiguous. Does it refer to the gross profit or profits after tax? Total benefit or benefit by share? The benefit is interpreted by various people in various manners.
Ignores time value of money
The fact that one rupee received today is of more than value than one rupee received later. This concept is to lead been unaware of to the errors in decision making.
It ignores risk
The future advantages can have various degrees of certainty. The more certain the return envisaged is, the more is its high value or reciprocally more is the return envisaged dubious. More is its lower value. This concept is also completely ignored. It also arranges the two proposals implying various degrees of risk.
A system based on the private property and the maximization of benefit could be effective, but it carries out it leads to the serious inequality of the income and the richness among various groups. Naturally, the contrary argument is that the company as a whole is clearly easier because it leads to the optimum allowance of the resources of the company.