Criticism of profit maximization approach, Financial Management

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Criticism of Profit Maximization Approach:

(i) Ambiguous: - One practical complexity with this approach is that the term profit is ambiguous. Different people take dissimilar meaning of term profit. For illustration:

  • Profit may be short-term or long-term.
  • Profit may be before tax or after tax.
  • Profit may be total profit or rate of profit.
  • Profit may be return on total capital employed or total assets or shareholders funds.

(ii) Ignores the Time Value of Money: - This approach disregard the time value of money. It doesn't make a distinction between profits earned over the different years. It ignores the fact that the worth of one rupee at present is greater than the value of same rupee received after one year.

(iii)Ignores Risk Factor: - This schema ignores the risk associated with the earnings. If the two firms have the entirety expected earnings however if earnings of one firm fluctuate considerably as compared to the other it will be more risky. It is therefore clear that profit maximization criterion is inappropriate and inappropriate. It isn't only ambiguous but fails to solve the problems of time value of money and the risk. An substitute to profit maximization which solves these problems is the criterion of wealth maximization.

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