Profit Maximisation Vs. Wealth Maximisation

One of the main objective of financial management has been profit maximisation and wealth maximisation. Profit maximisation focuses on improving profitability, maintaining the stability and reducing losses and inefficiencies.

1)    Profit may be considered in two senses :

1)    Profit maximisation for the owner;  and

2)    Profit maximisation  for others.

Normally profit is linked with efficiency, therefore, it is the test of efficiency. The limitation of this concept may be ambiguity which reflects different interpretation from different persons.

2)    Quality of profit – Usually,  profit is calculated in rupees.  The amount earned is known as profit. It ignores wastage, efficiency, employee’s skill, employee’s turnover, product mix, manufacturing process, administrative set-up etc., which may influence profit.

3)    Timing of benefit - In inflationary conditions, the value of profit may decrease. Therefore, the profits may not be comparable over a longer period span.

4)    Some economists argue that profit maximisation may result into unhealthy trends. The unhealthy trend may be harmful to the society. It may lead to exploitation, unhealthy competition and taking undue advantage of the position.

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