Profit maximization is one of the many goals of financial management. While earning a profit is the goal of every business, profit maximization in financial management can put too much emphasis on profits and not enough emphasis on other aspects of the business such as customer retention, social and economic well-being, and other goals and aspects of the company.
If profit maximization in financial management is a major goal of your business, it’s worth looking into why profit maximization has some limitations and why it isn’t always the best route to take when it comes to meeting the needs of your company.
Limitations of Profit Maximization
Long-Term Sustainable Goals
Profit maximization might be one of the top goals of financial management but this type of practice doesn’t imply that short-term profit increases will help produce long-term sustainable goals for the company. While profit maximization in financial management has the potential to bring in extra money in the short-term, long-term earning could be drastically diminished.
Lowering production quality for the sake of increased profits will hurt your brand, upset customers, and allow competitors to steal your business. For instance, if your organization decides to unload all available inventory to a demanding client, you’re only alienating loyal clients who would have spent more over time. When it comes to profit maximization in financial management, it’s important to understand if your short-term profit maximization efforts will lead to long-term sustainable goals.
Another limitation of profit maximization in financial management is the potential to decrease product quality. Earning higher profits might be one of the goals of financial management but cutting corners, using lower quality materials, and sacrificing company values to earn a higher profit will affect the reputation of the company and potentially lose customers.
It’s easy to force your employees to work harder without any pay raises or use environmentally damaging products to cut corners and maximize profits but cutting corners is the best way to ruin your brand reputation and cause the company to fail. While profit maximization is a major goal of financial management, it’s best to not cut corners or compromise company values to earn a few extra bucks that could cost you your customers and business.
A great way to reach profit maximization in financial management is to cut employee training or the research and development budget. While this will reduce operating expenses, and maximize short-term profits, it will not help the company reach any long-term sustainable goals and could even potentially cause employees harm. Employee training is essential for any company looking to maintain long-term profits while creating happy employees. Without a satisfied workforce, your company will fail and any corners you cut to maximize profits will not have been worth it.
There are many goals of financial management with profit maximization being a top priority. It’s important to understand, though, that only focusing on maximizing profits will create business turmoil and could do drastic harm to employees, customers, and the business as a whole. The best way to successfully reach profit maximization in financial management is to focus more on company integrity and long-term, sustainable goals. Short-term goals are a great way to meet long-term goals, but only if they have the company’s future in mind.