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Small Businessby Demand Media
Maximizing profits as a strategy is fine in the short term, but consequences exist.
profit image by Michael Shake from Fotolia.com
Related ArticlesWhen a firm applies profit maximization, it is basically saying that its primary focus is on profits, and it will use its resources solely to get the biggest profits possible, regardless of the consequences or the risk involved. Profit maximization is a generally short-term concept. Application usually lasts less than one year, although some companies employ this strategy exclusively, constantly jumping on the next big trend.
RiskPursuing a profit maximization strategy comes with the obvious risk that the company may be so entrenched in the singular strategy meant to maximize its profits that it loses everything if the market takes a sudden turn. For example, a company may find that it gets the most profit selling the Wii gaming system, so instead of keeping a balanced inventory, it invests solely in buying Wiis to sell. If the Wii goes out of favor or the makers of the Wii begin to limit the price that can be charged for the system, the company that relied solely on its investment in Wiis could lose everything. Similarly, if a company focuses only on maximizing its profit, it may miss opportunities for investment and expansion. Expectation and GoodwillYou also need to consider consequences of profit maximization. If a company pursues a profit maximization strategy, it creates an environment where price is a premium and cutting costs is a primary goal. This, in turn, creates a perception of the company that could lead to a loss of goodwill with customers and suppliers; for instance, a company may win subsequent contracts with a client by bidding the first job low. It also creates an expectation of shareholders to see immediate gains, rather than realizing profits over time. Cash FlowFor all its drawbacks, profit maximization carries the big advantage of creating cash flow. When maximizing profit is the primary consideration, investments, reinvestments and expansions are typically tabled. The company simply makes do on what it has. This can create a more cost-efficient environment. In the mean time, the profits keep building, producing a healthy bottom line and increasing the firm's amount of available cash. Sometimes profit maximization is used entirely to create an influx of cash so the firm can reduce its debt or save up for expansion. Financing and InvestorsSome degree of profit maximization is always present. The goal of a company is to create profits. It has to profit from its business to stay in business. Moreover, investors and financiers in the company may require a certain level of profits to secure funds for expansion. Further, a company has to perform well for its shareholders; they expect a return on their investments. As such, maximizing that profit is always a consideration to some extent. ReferencesRenee O'Farrell is a freelance writer providing valuable tips and advice for people looking for ways to save money, as well as information on how to create, re-purpose and reinvent everyday items. Her articles offer money-saving tips and valuable insight on typically confusing topics. O'Farrell is a member of the National Press Club and holds advanced degrees in business, financial management, psychology and sociology.
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Profit maximization ignores the risk associated with the stream of cash flow with the product. Also, profits for different types of stakeholders can not be maintained with profit maximization.
There are many advantages of wealth maximization which include creating a security for the future and also living a quality lifestyle. There are also disadvantages which may include becoming vulnerable and prone to criminals and you might also end up being isolated.
WHAT IS THE PROFIT MAXIMISATION?
Both profit maximization and wealth maximization have the objective of increasing the net worth.
1. Profit Maximisation is the main objective of a firm" Discuss this statement with the help of an example.
Advantages: Competition > profit > innovation. Disadvantages: higher costs for consumers there are losers risk for an entrepreneur
disadvantages you can go prison its bad and you shouldn't do it cheating innocent people out their money if caught u get fined ALOT advantages you get losts of money extra revenue means more profit
WHAT IS THE PROFIT MAXIMISATION?
Both profit maximization and wealth maximization have the objective of increasing the net worth.
1. Profit Maximisation is the main objective of a firm" Discuss this statement with the help of an example.
Advantages: Competition > profit > innovation. Disadvantages: higher costs for consumers there are losers risk for an entrepreneur
Profit maximization sales maximisation growth maximisation utility maximisation satisfying behavior long run survival welfare objectives
the difference between Profit maximisation and share price maximisation
The advantages are that you can get donations to fund your charity The disadvantages of a charity are that the details are exposed to the general public. The charity does not work to make a profit.
the advantages of reinvesting profits are :- -no interest rates the disadvantages of reinvesting profits are:- -only the amount of money in the business can be reinvested -dont get income from investment
Not sure what you're asking - a "Profit and Loss" is a slang name / jargon for an Income Statement.
There are a number of advantages and disadvantages to the fair trade system. Advantages include fair wages, a higher profit, and safer working conditions. Disadvantages of fair trade include the cost of certification and the favoring of co-ops over individuals.
is this in relation to energy markets?
Some advantages of penetration pricing would be obtaining a large share of the market so that they dominate the market. Disadvantages would be not making a profit at all in the beginning stages.