Profit maximization is the most popular hypothesis in economic analysis, but there are many other important objectives, which are not to be avoided by any firm. Modem business firms pursue multiple objectives.
An important aspect of profit is its use in measuring and controlling performances of the individuals of the large business firms. Researches have concluded that the business individuals of middle and top management often deviate from profit objective and try to maximize their own utility functions. They give importance to job security, personal ambitions for promotion, larger perks, etc. But this often conflicts with firms profit-making objective.
The reasons for conflicts are as follows:
- More energy is spent in expanding sales volume and product lines than in raising profitability.
- Subordinates spend too much time and money doing jobs perfectly regardless of its cost and usefulness.
- Individuals depend more to the needs of job security in the absence of any reward.
In order to control the conflicts and directing the individuals towards the profit objective, the top management uses decentralization and control-by-profit techniques. Decentralization is achieved by changing over from functional division of business activities such as production branch, sales division, purchase department, etc. to a system of commodity wise division. By doing so, managerial responsibilities are fixed in terms of profit. Under the general policy framework, managers enjoy self-sufficiency in their operations. They are allotted a certain amount to spend and a profit target to be achieved by the particular division. Profit is then-the measure of performance of each individual, not of the sales or quality. This kind of reorganization of management helps in assessing profit-performance of every individual.
The two important problems that arise in the determination of profits are as follows:
- Either the profit goals are set in terms of total net profit for the divisions or they should be restricted to their share in the total net profit.
- Determination of divisional profits when there is a vertical integration. The most appropriate profit standard of divisional performance is calculated by deducting current expenses from revenue of the firm.
Profit is essential for survival of a business. In the absence of profits, the organisations will use up their own capital and close down. It also helps in replacing obsolete machinery and equipment and thus ensures the continuity of a business.