Setting a Reasonable Profit Target in Business

A business firm has various objectives to achieve. The survival of a firm depends on the profit it can make. So, whatever the goal of the firm may be, it has to be a profitable firm. The other goals of a business firm can be sales revenue  maximization,  maximization  of firm’s growth,  maximization  of managers’ utility function, long-run survival, market share or entry-prevention. In technical  sense    maximization  of profit, as a business objective, may not sound practical , but profit has to be there in the objective function of the firms for its survival. The firms may differ on the level of profit and the extent to which it is to be achieved by various firms. Some firms set standard profit as their objective, while some of them may set target profit and some reasonable profit as their objective to be achieved. A reasonable profit, as a business objective, is the most common objective. The policy question related to setting standard or criteria for reasonable profits are as follows:

  • Why do modem corporations aim at a reasonable profit rather than attempting to  maximize  profit?
  • What are the criteria for a reasonable profit?
  • How should reasonable profits be determined?

Following are the suggestions as given by various economists to answer the above policy questions:

  1. Preventing entry of competitors: Under imperfect market conditions, profit  maximization  generally leads to a high pure profit, which attracts competitors, especially ill case of a weak monopoly. Therefore, the firms adopt a pricing and a profit policy that assures them a reasonable profit. At the same time, it also keeps the potential competitors away.
  2. Maintaining a good public image: It is often necessary for large corporations to project and maintain a good public image. This is because if public opinion turns against it and government officials ‘start questioning the profit figures, firms may find it difficult to work smoothly. So most firms set their prices lower than that to earn the maximum profit but higher enough to ensure a reasonable profit.
  3. Restraining trade union demands: High profits make trade unions feel that they have a share in the high profit and therefore they demand for wage-hike. Wage-hike may interrupt the firm’s objective of  maximizing  profit. Any delay in profit is sometimes used as a weapon against trade union activities.
  4. Maintaining customer goodwill: Customer’s goodwill plays a significant role in maintaining and promoting demand for the product of a firm. Customer’s goodwill depends on the quality of the product and its fair price to a large extent. Firms aiming at  better  profit prospects in the long run, give up their short-run profit  maximization  objective in  favor  of a reasonable profit.
  5. Other factors: The other factors that interrupts the profit  maximization  objective include the following:
    1. Managerial utility function, which is preferable for, profits  maximization  to firms.
    2. Friendly relations between executive levels within the firm.
    3. Maintaining internal control over management by restricting firm’s size and profit.

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