Profit is the reward which goes to organization as a factor of production for its participation in the process of production. Profit in its pure accounting sense is the surplus of revenue over the cost.
Thus, P = TR – TC
We have also studied that every business enterprise desires to maximize its profit. The condition for profit maximization is the level of output where Marginal Revenue = Marginal Cost. We also differentiate between normal profit and super normal profit i.e. normal profit is included in average cost whereas any profit above the average cost is super normal profit. We have also considered the concepts of gross profit and net profit besides profit in accounting sense, which considers only explicit cost whereas in economic sense to consider profit we take note of both explicit and implicit costs. The firm has also to reveal to its shareholders the profit before tax as well as profit after tax.
After all, ‘Business of businessman is business’ and therefore profit becomes the acid test of economic performance of any business enterprise. The aim is to maximize profit but if not maximum profit then at least certain satisfactory level of profit. However, following factors relegate profit maximization policy to the background:
- Government interference : This has two aspects. First, there is always the threat of nationalization and second, the Government may appoint a Commission to scrutinize the affairs of the company.
- Threat of entry of new firm i.e. if the firm maximizes profit it automatically attracts new producers to enter the same area of operation which adversely affect its profit.
- Image building or tarnishing of the image of the firm i.e. the firm does not necessarily work for maximizing profits but works mainly to gain and retain the goodwill of the consumers or else it may be blamed for exploiting the consumers and therefore high profits may be looked upon with contempt as a means of consumer’s exploitation and hence would become socially undesirable.
- The firm would like to have a balance liquidity and profitability.
- The firm will have to preserve good employer-employee relationship. High profit may lead to trade unions demanding higher wages.
- The business enterprise has also to maintain proper Balance Sheet Ratios for the purpose of auditing as well as for upholding the interests of the shareholders.
Thus, the above mentioned considerations relegate the policy of profit maximization and hence the firm will have to be satisfied by earning maximum possible profits within the above mentioned constraints. Therefore, maximum possible profit without in any way tarnishing the image of the enterprise so as to serve and satisfy more consumers should be the objective that should underlie the management of profits.