Profit Maximization

Profit maximization is the main aim of any business and therefore it is also an objective of financial management. Profit maximization, in financial management, represents the process or the approach by which profits (EPS) of the business are increased. In simple words, all the decisions whether investment, financing, or dividend etc are focused on maximizing the profits to optimum levels.

Profit maximization is the traditional approach and the primary objective of financial management. It implies that every decision relating to business is evaluated in the light of profits. All the decision with respect to new projects, acquisition of assets, raising capital, distributing dividends etc are studied for their impact on profits and profitability. If the result of a decision is perceived to have a positive effect on the profits, the decision is taken further for implementation.

Profit Maximization Theory / Model

The Rationale / Benefits:

Profit maximization theory of directing business decisions is encouraged because of following advantages associated with it.

Profit Maximization or Maximization of ProfitsEconomic Survival

Profit maximization theory is based on profits and profits are a must for survival of any business.

Measurement Standard

Profits are the true measurement of the viability of a business model. Without profits, the business losses its primary objective and therefore has a direct risk to its survival.

Social and Economic Welfare

The profit maximization objective indirectly caters to social welfare. In a business, profits prove efficient utilization and allocation of resources. Resource allocation and payments for land, labor, capital and organization takes care of social and economic welfare.

Limitations of Profit Maximization as an objective of Financial Management

Profit maximization is criticized for some of its limitations which are discussed below:

The haziness of the concept “Profit”

The term “Profit” is a vague term. It is because different mindset will have different perception about profit. For e.g. profits can be the net profit, gross profit, before tax profit, or the rate of profit etc. There is no clear defined profit maximization rule about the profits.

Ignores Time Value of Money

The profit maximization formula simply suggests “higher the profit better is the proposal”. In essence, it is considering the naked profits without considering the timing of them. Another important dictum of finance says “a dollar today is not equal to a dollar a year later”. So, the time value of money is completely ignored.

Ignores the Risk

A decision solely based on profit maximization model would take a decision in favor of profits. In the pursuit of profits, the risk involved is ignored which may prove unaffordable at times simply because higher risks directly questions the survival of a business.

Ignores Quality

The most problematic aspect of profit maximization as an objective is that it ignores the intangible benefits such as quality, image, technological advancements etc. The contribution of intangible assets in generating value for a business is not worth ignoring. They indirectly create assets for the organization.

Profit maximization ruled the traditional business mindset which has gone through drastic changes. In the modern approach of business and financial management, much higher importance is assigned to wealth maximization in comparison of Profit Maximization vs. Wealth Maximization. The loosing importance of profit maximization is not baseless and it is not only because it ignores certain important areas such as risk, quality, and the time value of money but also because of the superiority of wealth maximization as an objective of the business or financial management.

Last updated on : July 31st, 2017
What’s your view on this? Share it in comments below.


  1. Sumeeth.M.B
  2. convey

Leave a Reply

Corporate Financial Management
  • How to Choose Right Source of Finance for Your Business
    How to Choose Right Source of Finance …
  • Wealth Maximization
    Wealth Maximization
  • Financing Strategies
    Financing Strategies
  • Revenue vs. Profit
    Revenue vs. Profit
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    define acid test ratiovariable costing advantagescash position ratiodebenture holdermanagement of transaction exposuredebenture trust deedhow to calculate trade discountcalculate dividend payout ratiodisadvantage of irrdisadvantages of dividend discount modelmiller & modiglianifixed asset turn over ratiobusiness overdraft facilityweighted average cost of capital problems and solutionsar turnover in days formulaprofitability index equationbenefit cost ratio advantages and disadvantagesdebtor days definitionoverdraft chequestockholders equity calculatorebitda to net incomedebenture bondsexternal financing formulalc usance periodlimitation of payback periodadvantages and disadvantages of internal rate of returncomparing two companies financial ratiosfurniture meaning in hindihindi meaning of leverageaccounts receivable turnover ratio calculatordetachable warrantsynonyms of ascertaindeep discounted bondsatr financewhats capital employedmeaning of credit and debit in accountingnpv advantages and disadvantagesoverdraft facility meansprofitability ratio examplesbank guarantee invocationdebentures in indiadividend valuation model advantages and disadvantagesgaap straight line depreciationdefinition of budgeting in management accountingmotives behind mergers and acquisitionsmeaning of hypothecation in hindihigh solvency ratiocredit turnover ratio formulastock velocity ratio formulano arbitrage pricing theoryfixed selling and administrative expensesroe rocetobin's q ratiotangible assets ifrsinvestopedia working capitalcapm vs waccwealth maximisationdefinition of solvency ratiodisadvantages of overdraftwhat is bank overdraft definitionwhat is cash flow and fund flowcash coverage ratio definitionebit operating profitfinance lease vs capital leaserevaluation method ifrsnet cash accruals formulagordons mathstobin's q formulacurrent cash debt coveragezero based budgeting pptadvantages and disadvantages of internal rate of returnadvantages of cvpcapital gearing ratio meaningmanagement of economic exposure