Limitation of profit maximisation -quality of benefits, Financial Management

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Limitation of profit maximisation -Quality of Benefits

Probably the most vital technical limitation of profit maximisation as an operational objective, is that it ignores quality aspect of benefits associated with a financial course of action. Term quality here refers to the degree of certainty with which benefits can be expected. As a rule, the more certain the expected return, the higher is the quality of benefits. On the other hand, the more uncertain/ fluctuating is the expected benefits, the lower is the quality of benefits.

Anfluctuating and uncertain return implies risk to investors. It can be safely presumed that investors are risk-averters that is they want to avoid or at least minimise risk. They can, so, be reasonably expected to have a preference for a return which is more certain in the sense that it has smaller variance over the years. Problem of uncertainty renders profit maximisation unsuitable as an operational criterion for financial management as it considers only size of benefits and gives no weight to degree of uncertainty of future benefits.

 


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