Maximising Profit

Profit here would normally be interpreted as accounting profit, This objective arises from the fact that the shareholders are the owners of the business and, as such, both the exercisers of ultimate control and the
beneficiaries of profits. It is therefore argued that the shareholders will cause managers to pursue policies that would be expected to result in the maximum possible profit. This analysis is acceptable up to a point, but maximising profit could easily be sub-optimal to the shareholders. It may be possible to increase profit by expanding the
business’s scale of operations. If the increase merely results from the raising of additional external finance, it might mean that profit per share could actually decrease,
leaving the shareholders worse off.
Pharmaceutical products manufacturers typically spend vast amounts of money on developing and testing new products. It is in the nature of the industry that the time taken to bring a new drug to the market can easily be ten years. A particular business that stopped spending money on research and development would enhance current
profit because costs would be cut but revenues arising from continuing to sell drugs developed in past years would continue for the time being. Thus current profits would be buoyant but the business would face a bleak future since there would be no new drugs to replace the old ones.
It is probably open to most businesses to increase their profits without additional investment if they are prepared to take additional risks. For example, cost cutting on the control of the quality of the business’s output could lead to increased profits, at least in the short term. In the longer term, placing substandard products on the market could lead to the loss of future sales and profits.
Clearly, increasing profitability through greater efficiency is a desirable goal from the shareholders’ point of view. However, maximisation of profit is far too broad a definition of what is likely to be beneficial to shareholders.

Click here for government certification in Accounting, Banking & Finance