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Small Businessby Demand Media
Maximizing profits as a strategy is fine in the short term, but consequences exist.
profit image by Michael Shake from Fotolia.com
Related ArticlesWhen a firm applies profit maximization, it is basically saying that its primary focus is on profits, and it will use its resources solely to get the biggest profits possible, regardless of the consequences or the risk involved. Profit maximization is a generally short-term concept. Application usually lasts less than one year, although some companies employ this strategy exclusively, constantly jumping on the next big trend.
RiskPursuing a profit maximization strategy comes with the obvious risk that the company may be so entrenched in the singular strategy meant to maximize its profits that it loses everything if the market takes a sudden turn. For example, a company may find that it gets the most profit selling the Wii gaming system, so instead of keeping a balanced inventory, it invests solely in buying Wiis to sell. If the Wii goes out of favor or the makers of the Wii begin to limit the price that can be charged for the system, the company that relied solely on its investment in Wiis could lose everything. Similarly, if a company focuses only on maximizing its profit, it may miss opportunities for investment and expansion. Expectation and GoodwillYou also need to consider consequences of profit maximization. If a company pursues a profit maximization strategy, it creates an environment where price is a premium and cutting costs is a primary goal. This, in turn, creates a perception of the company that could lead to a loss of goodwill with customers and suppliers; for instance, a company may win subsequent contracts with a client by bidding the first job low. It also creates an expectation of shareholders to see immediate gains, rather than realizing profits over time. Cash FlowFor all its drawbacks, profit maximization carries the big advantage of creating cash flow. When maximizing profit is the primary consideration, investments, reinvestments and expansions are typically tabled. The company simply makes do on what it has. This can create a more cost-efficient environment. In the mean time, the profits keep building, producing a healthy bottom line and increasing the firm's amount of available cash. Sometimes profit maximization is used entirely to create an influx of cash so the firm can reduce its debt or save up for expansion. Financing and InvestorsSome degree of profit maximization is always present. The goal of a company is to create profits. It has to profit from its business to stay in business. Moreover, investors and financiers in the company may require a certain level of profits to secure funds for expansion. Further, a company has to perform well for its shareholders; they expect a return on their investments. As such, maximizing that profit is always a consideration to some extent. ReferencesRenee O'Farrell is a freelance writer providing valuable tips and advice for people looking for ways to save money, as well as information on how to create, re-purpose and reinvent everyday items. Her articles offer money-saving tips and valuable insight on typically confusing topics. O'Farrell is a member of the National Press Club and holds advanced degrees in business, financial management, psychology and sociology.
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