Profit Maximisation

Financial management.

Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations".

- Joseph and Massie

Financial management is that part of management which is concerned mainly with raising funds in the most economic and suitable manner; using these funds as profitably as possible.

Objectives of financial management:

There are two widely applied approaches, viz.

 profit maximization and

 wealth maximization.

Profit maximization

It is the process by which a firm determines the price and output level that returns the greatest profit. In this approach, actions that Increase profits should be undertaken and the actions that decrease the profits are avoided

profits = revenue – costs

The objections to this theory are as follows .

 First and foremost the profit maximization assumes perfect competition in the marketplace , which for all practical purposes does not exist .

 Secondly as we saw earlier on that in the first phase of development the businesses are self financing with single owner. The only aim of the single owner is to enhance his individual wealth. But now the single owner is by and large been replaced by professional managers who are salaried employees , and equity shareholders .

 For eg: If a cigarette manufacturing firm , goes on concentrating on making profit without caring for the health of the society , it will soon find itself at the wrong end of the law and will have to pay heavy penalties to the society .

 Also the term profit itself is somewhat ambiguous .

 Lastly the profit maximization does not consider the time value of money .