Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.

Poor financial management in pharmacy leads to insufficient operating funds. This is one of

the main reasons why 50 percentage of small businesses fail within the first year. It is important
for pharmacy owners to understand their financial data to avoid becoming failure statistics.

Scope/Elements

1. Investment decisions includes investment in fixed assets (called as capital budgeting).

Investment in current assets are also a part of investment decisions called as working
capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of financing and
the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend
upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital
so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs
and profits and future programmes and policies of a concern. Estimations have to be
made in an adequate manner which increases earning capacity of enterprise.
 2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity
analysis. This will depend upon the proportion of equity capital a company is possessing
and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many
choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of
financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision has to be made by the finance manager.
This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintainance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Definition of Financial Planning

Financial Planning is the process of estimating the capital required and determining it’s
competition. It is the process of framing financial policies in relation to procurement, investment
and administration of funds of an enterprise.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

a. Determining capital requirements- This will depend upon factors like cost of current
and fixed assets, promotional expenses and long- range planning. Capital requirements
have to be looked with both aspects: short- term and long- term requirements.
b. Determining capital structure- The capital structure is the composition of capital, i.e.,
the relative kind and proportion of capital required in the business. This includes
decisions of debt- equity ratio- both short-term and long- term.
c. Framing financial policies with regards to cash control, lending, borrowings, etc.
 d. A finance manager ensures that the scarce financial resources are maximally utilized
in the best possible manner at least cost in order to get maximum returns on investment.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and

budgets regarding the financial activities of a concern. This ensures effective and adequate
financial and investment policies. The importance can be outlined as-

1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of
funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies
which exercise financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in
long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which
can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to
growth of the company. This helps in ensuring stability an d profitability in concern.

Finance Functions
The following explanation will help in understanding each finance function in detail
Investment Decision
One of the most important finance functions is to intelligently allocate capital to long term assets.
This activity is also known as capital budgeting. It is important to allocate capital in those long
term assets so as to get maximum yield in future. Following are the two aspects of investment
decision

Evaluation of new investment in terms of profitability

Comparison of cut off rate against new investment and prevailing investment.
Since the future is uncertain therefore there are difficulties in calculation of expected return.
Along with uncertainty comes the risk factor which has to be taken into consideration. This risk
factor plays a very significant role in calculating the expected return of the prospective
investment. Therefore while considering investment proposal it is important to take into
consideration both expected return and the risk involved.

Investment decision not only involves allocating capital to long term assets but also involves
decisions of using funds which are obtained by selling those assets which become less profitable
and less productive. It wise decisions to decompose depreciated assets which are not adding
value and utilize those funds in securing other beneficial assets. An opportunity cost of capital
needs to be calculating while dissolving such assets. The correct cut off rate is calculated by
using this opportunity cost of the required rate of return (RRR)
Financial Decision
Financial decision is yet another important function which a financial manger must perform. It is
important to make wise decisions about when, where and how should a business acquire funds.
Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an
equity and debt has to be maintained. This mix of equity capital and debt is known as a firm’s
capital structure.

A firm tends to benefit most when the market value of a company’s share maximizes this not
only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand
the use of debt affects the risk and return of a shareholder. It is more risky though it may increase
the return on equity funds.

A sound financial structure is said to be one which aims at maximizing shareholders return with
minimum risk. In such a scenario the market value of the firm will maximize and hence an
optimum capital structure would be achieved. Other than equity and debt there are several other
tools which are used in deciding a firm capital structure.

Dividend Decision
Earning profit or a positive return is a common aim of all the businesses. But the key function a
financial manger performs in case of profitability is to decide whether to distribute all the profits
to the shareholder or retain all the profits or distribute part of the profits to the shareholder and
retain the other half in the business.

It’s the financial manager’s responsibility to decide a optimum dividend policy which maximizes
the market value of the firm. Hence an optimum dividend payout ratio is calculated. It is a
common practice to pay regular dividends in case of profitability Another way is to issue bonus
shares to existing shareholders.

Liquidity Decision
It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s
profitability, liquidity and risk all are associated with the investment in current assets. In order to
maintain a tradeoff between profitability and liquidity it is important to invest sufficient funds in
current assets. But since current assets do not earn anything for business therefore a proper
calculation must be done before investing in current assets.

Current assets should properly be valued and disposed of from time to time once they become
non profitable. Currents assets must be used in times of liquidity problems and times of
insolvency.
The Role of the Finance Function in Organizational Processes

The Finance Function and the Project Office

Contemporary organizations need to practice cost control if they are to survive the recessionary
times. Given the fact that many top tier companies are currently mired in low growth and less
activity situations, it is imperative that they control their costs as much as possible. This can
happen only when the finance function in these companies is diligent and has a hawk eye
towards the costs being incurred. Apart from this, companies also have to introduce efficiencies
in the way their processes operate and this is another role for the finance function in modern day
organizations.

There must be synergies between the various processes and this is where the finance function can
play a critical role. Lest one thinks that the finance function, which is essentially a support
function, has to do this all by themselves, it is useful to note that, many contemporary
organizations have dedicated project office teams for each division, which perform this function.

In other words, whereas the finance function oversees the organizational processes at a macro
level, the project office teams indulge in the same at the micro level. This is the reason why
finance and project budgeting and cost control have assumed significance because after all,
companies exist to make profits and finance is the lifeblood that determines whether
organizations are profitable or failures.

The Pension Fund Management and Tax Activities of the Finance Function

The next role of the finance function is in payroll, claims processing, and acting as the repository
of pension schemes and gratuity. If the US follow the 401(k) rule and the finance function
manages the defined benefit and defined contribution schemes, in India it is the EPF or the
Employee Provident Funds that are managed by the finance function. Of course, only large
organizations have dedicated EPF trusts to take care of these aspects and the norm in most other
organizations is to act as facilitators for the EPF scheme with the local or regional PF (Provident
Fund) commissioner.

The third aspect of the role of the finance function is to manage the taxes and their collection at
source from the employees. Whereas in the US, TDS or Tax Deduction at Source works
differently from other countries, in India and much of the Western world, it is mandatory for
organizations to deduct tax at source from the employees commensurate with their pay and
benefits.

The finance function also has to coordinate with the tax authorities and hand out the annual tax
statements that form the basis of the employee’s tax returns. Often, this is a sensitive and critical
process since the tax rules mandate very strict principles for generating the tax statements.

Payroll, Claims Processing, and Automation

We have discussed the pension fund management and the tax deduction. The other role of the
finance function is to process payroll and associated benefits in time and in tune with the
regulatory requirements.
Claims made by the employees with respect to medical, and transport allowances have to be
processed by the finance function. Often, many organizations automate this routine activity
wherein the use of ERP (Enterprise Resource Planning) software and financial workflow
automation software make the job and the task of claims processing easier. Having said that, it
must be remembered that the finance function has to do its due diligence on the claims being
submitted to ensure that bogus claims and suspicious activities are found out and stopped. This is
the reason why many organizations have experienced chartered accountants and financial
professionals in charge of the finance function so that these aspects can be managed
professionally and in a trustworthy manner.

The key aspect here is that the finance function must be headed by persons of high integrity and
trust that the management reposes in them must not be misused. In conclusion, the finance
function though a non-core process in many organizations has come to occupy a place of
prominence because of these aspects.

Role of a Financial Manager

Financial activities of a firm is one of the most important and complex activities of a firm.
Therefore in order to take care of these activities a financial manager performs all the requisite
financial activities.

A financial manger is a person who takes care of all the important financial functions of an
organization. The person in charge should maintain a far sightedness in order to ensure that the
funds are utilized in the most efficient manner. His actions directly affect the Profitability,
growth and goodwill of the firm.

Following are the main functions of a Financial Manager:

1. Raising of Funds
In order to meet the obligation of the business it is important to have enough cash and liquidity.
A firm can raise funds by the way of equity and debt. It is the responsibility of a financial
manager to decide the ratio between debt and equity. It is important to maintain a good balance
between equity and debt.

2. Allocation of Funds
Once the funds are raised through different channels the next important function is to allocate the
funds. The funds should be allocated in such a manner that they are optimally used. In order to
allocate funds in the best possible manner the following point must be considered

The size of the firm and its growth capability

Status of assets whether they are long-term or short-term
Mode by which the funds are raised
These financial decisions directly and indirectly influence other managerial activities. Hence
formation of a good asset mix and proper allocation of funds is one of the most important
activity
 3. Profit Planning
Profit earning is one of the prime functions of any business organization. Profit earning is
important for survival and sustenance of any organization. Profit planning refers to proper usage
of the profit generated by the firm.

Profit arises due to many factors such as pricing, industry competition, state of the economy,
mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors
of production can lead to an increase in the profitability of the firm.

Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In
order to maintain a tandem it is important to continuously value the depreciation cost of fixed
cost of production. An opportunity cost must be calculated in order to replace those factors of
production which has gone thrown wear and tear. If this is not noted then these fixed cost can
cause huge fluctuations in profit.

4. Understanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous sale and purchase of
securities. Hence a clear understanding of capital market is an important function of a financial
manager. When securities are traded on stock market there involves a huge amount of risk
involved. Therefore a financial manger understands and calculates the risk involved in this
trading of shares and debentures.

Its on the discretion of a financial manager as to how to distribute the profits. Many investors do
not like the firm to distribute the profits amongst share holders as dividend instead invest in the
business itself to enhance growth. The practices of a financial manager directly impact the
operation in capital market.

Capital Structure - Meaning and Factors Determining Capital Structure

Meaning of Capital Structure

Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as
long-term finance. The capital structure involves two decisions-

a. Type of securities to be issued are equity shares, preference shares and long term
borrowings (Debentures).
b. Relative ratio of securities can be determined by process of capital gearing. On this basis,
the companies are divided into two-
i. Highly geared companies - Those companies whose proportion of equity
capitalization is small.
ii. Low geared companies - Those companies whose equity capital dominates total
capitalization.

For instance - There are two companies A and B. Total capitalization amounts to be USD
200,000 in each case. The ratio of equity capital to total capitalization in company A is
USD 50,000, while in company B, ratio of equity capital is USD 150,000 to total
 capitalization, i.e, in Company A, proportion is 25% and in company B, proportion is
75%. In such cases, company A is considered to be a highly geared company and
company B is low geared company.

Factors Determining Capital Structure

1. Trading on Equity- The word “equity” denotes the ownership of the company. Trading
on equity means taking advantage of equity share capital to borrowed funds on
reasonable basis. It refers to additional profits that equity shareholders earn because of
issuance of debentures and preference shares. It is based on the thought that if the rate of
dividend on preference capital and the rate of interest on borrowed capital is lower than
the general rate of company’s earnings, equity shareholders are at advantage which
means a company should go for a judicious blend of preference shares, equity shares as
well as debentures. Trading on equity becomes more important when expectations of
shareholders are high.
2. Degree of control- In a company, it is the directors who are so called elected
representatives of equity shareholders. These members have got maximum voting rights
in a concern as compared to the preference shareholders and debenture holders.
Preference shareholders have reasonably less voting rights while debenture holders have
no voting rights. If the company’s management policies are such that they want to retain
their voting rights in their hands, the capital structure consists of debenture holders and
loans rather than equity shares.
3. Flexibility of financial plan- In an enterprise, the capital structure should be such that
there is both contractions as well as relaxation in plans. Debentures and loans can be
refunded back as the time requires. While equity capital cannot be refunded at any point
which provides rigidity to plans. Therefore, in order to make the capital structure
possible, the company should go for issue of debentures and other loans.
4. Choice of investors- The company’s policy generally is to have different categories of
investors for securities. Therefore, a capital structure should give enough choice to all
kind of investors to invest. Bold and adventurous investors generally go for equity shares
and loans and debentures are generally raised keeping into mind conscious investors.
5. Capital market condition- In the lifetime of the company, the market price of the shares
has got an important influence. During the depression period, the company’s capital
structure generally consists of debentures and loans. While in period of boons and
inflation, the company’s capital should consist of share capital generally equity shares.
6. Period of financing- When company wants to raise finance for short period, it goes for
loans from banks and other institutions; while for long period it goes for issue of shares
and debentures.
7. Cost of financing- In a capital structure, the company has to look to the factor of cost
when securities are raised. It is seen that debentures at the time of profit earning of
company prove to be a cheaper source of finance as compared to equity shares where
equity shareholders demand an extra share in profits.
8. Stability of sales- An established business which has a growing market and high sales
turnover, the company is in position to meet fixed commitments. Interest on debentures
has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are
high and company is in better position to meet such fixed commitments like interest on
debentures and dividends on preference shares. If company is having unstable sales, then
 the company is not in position to meet fixed obligations. So, equity capital proves to be
safe in such cases.
9. Sizes of a company- Small size business firms capital structure generally consists of
loans from banks and retained profits. While on the other hand, big companies having
goodwill, stability and an established profit can easily go for issuance of shares and
debentures as well as loans and borrowings from financial institutions. The bigger the
size, the wider is total capitalization.

Capitalization in Finance
What is Capitalization

Capitalization comprises of share capital, debentures, loans, free reserves,etc. Capitalization

represents permanent investment in companies excluding long-term loans. Capitalization can be
distinguished from capital structure. Capital structure is a broad term and it deals with qualitative
aspect of finance. While capitalization is a narrow term and it deals with the quantitative aspect.

Capitalization is generally found to be of following types-

 Normal
 Over
 Under

Overcapitalization
Overcapitalization is a situation in which actual profits of a company are not sufficient
enough to pay interest on debentures, on loans and pay dividends on shares over a period
of time. This situation arises when the company raises more capital than required. A part
of capital always remains idle. With a result, the rate of return shows a declining trend.
The causes can be-

1. High promotion cost- When a company goes for high promotional expenditure, i.e.,
making contracts, canvassing, underwriting commission, drafting of documents, etc. and
the actual returns are not adequate in proportion to high expenses, the company is over-
capitalized in such cases.
2. Purchase of assets at higher prices- When a company purchases assets at an inflated
rate, the result is that the book value of assets is more than the actual returns. This
situation gives rise to over-capitalization of company.
3. A company’s floatation n boom period- At times company has to secure it’s solvency
and thereby float in boom periods. That is the time when rate of returns are less as
compared to capital employed. This results in actual earnings lowering down and
earnings per share declining.
 4. Inadequate provision for depreciation- If the finance manager is unable to provide an
adequate rate of depreciation, the result is that inadequate funds are available when the
assets have to be replaced or when they become obsolete. New assets have to be
purchased at high prices which prove to be expensive.
5. Liberal dividend policy- When the directors of a company liberally divide the dividends
into the shareholders, the result is inadequate retained profits which are very essential for
high earnings of the company. The result is deficiency in company. To fill up the
deficiency, fresh capital is raised which proves to be a costlier affair and leaves the
company to be over- capitalized.
6. Over-estimation of earnings- When the promoters of the company overestimate the
earnings due to inadequate financial planning, the result is that company goes for
borrowings which cannot be easily met and capital is not profitably invested. This results
in consequent decrease in earnings per share.

Effects of Overcapitalization

1. On Shareholders- The over capitalized companies have following disadvantages to

shareholders:
a. Since the profitability decreases, the rate of earning of shareholders also
decreases.
b. The market price of shares goes down because of low profitability.
c. The profitability going down has an effect on the shareholders. Their earnings
become uncertain.
d. With the decline in goodwill of the company, share prices decline. As a result
shares cannot be marketed in capital market.
2. On Company-
a. Because of low profitability, reputation of company is lowered.
b. The company’s shares cannot be easily marketed.
c. With the decline of earnings of company, goodwill of the company declines and
the result is fresh borrowings are difficult to be made because of loss of
credibility.
d. In order to retain the company’s image, the company indulges in malpractices like
manipulation of accounts to show high earnings.
e. The company cuts down it’s expenditure on maintainance, replacement of assets,
adequate depreciation, etc.
3. On Public- An overcapitalized company has got many adverse effects on the public:
a. In order to cover up their earning capacity, the management indulges in tactics
like increase in prices or decrease in quality.
b. Return on capital employed is low. This gives an impression to the public that
their financial resources are not utilized properly.
c. Low earnings of the company affects the credibility of the company as the
company is not able to pay it’s creditors on time.
d. It also has an effect on working conditions and payment of wages and salaries
also lessen.
Undercapitalization
An undercapitalized company is one which incurs exceptionally high profits as
compared to industry. An undercapitalized company situation arises when the estimated
earnings are very low as compared to actual profits. This gives rise to additional funds,
additional profits, high goodwill, high earnings and thus the return on capital shows an
increasing trend. The causes can be-

1. Low promotion costs

2. Purchase of assets at deflated rates
3. Conservative dividend policy
4. Floatation of company in depression stage
5. High efficiency of directors
6. Adequate provision of depreciation
7. Large secret reserves are maintained.

Efffects of Under Capitalization

1. On Shareholders
a. Company’s profitability increases. As a result, rate of earnings go up.
b. Market value of share rises.
c. Financial reputation also increases.
d. Shareholders can expect a high dividend.
2. On company
a. With greater earnings, reputation becomes strong.
b. Higher rate of earnings attract competition in market.
c. Demand of workers may rise because of high profits.
d. The high profitability situation affects consumer interest as they think that the
company is overcharging on products.
3. On Society
a. With high earnings, high profitability, high market price of shares, there can be
unhealthy speculation in stock market.
b. ‘Restlessness in general public is developed as they link high profits with high
prices of product.
c. Secret reserves are maintained by the company which can result in paying lower
taxes to government.
d. The general public inculcates high expectations of these companies as these
companies can import innovations, high technology and thereby best quality of
product.

Financial Goal - Profit v/s Wealth

Every firm has a predefined goal or an objective. Therefore the most important goal of a
financial manager is to increase the owner’s economic welfare. Here economics welfare may
refer to maximization of profit or maximization of shareholders wealth. Therefore Shareholders
wealth maximization (SWM) plays a very crucial role as far as financial goals of a firm are
concerned.

Profit is the remuneration paid to the entrepreneur after deduction of all expenses.
Maximization of profit can be defined as maximizing the income of the firm and
minimizing the expenditure. The main responsibility of a firm is to carry out business by
manufacturing goods and services and selling them in the open market. The mechanism of
demand and supply in an open market determine the price of a commodity or a service. A firm
can only make profit if it produces a good or delivers a service at a lower cost than what is
prevailing in the market. The margin between these two prices would only increase if the firm
strives to produce these goods more efficiently and at a lower price without compromising on the
quality.

The demand and supply mechanism plays a very important role in determining the price of a
commodity. A commodity which has a greater demand commands a higher price and hence may
result in greater profits. Competition among other suppliers also effect profits. Manufacturers
tends to move towards production of those goods which guarantee higher profits. Hence there
comes a time when equilibrium is reached and profits are saturated.

According to Adam Smith - business man in order to fulfill their profit motive in turn
benefits the society as well. It is seen that when a firm tends to increase profit it eventually
makes use of its resources in a more effective manner. Profit is regarded as a parameter to
measure firm’s productivity and efficiency. Firms which tend to earn continuous profit
eventually improvise their products according to the demand of the consumers. Bulk production
due to massive demand leads to economies of scale which eventually reduces the cost of
production. Lower cost of production directly impacts the profit margins. There are two ways to
increase the profit margin due to lower cost. Firstly a firm can produce at lower sot but continue
to sell at the original price, thereby increasing the revenue. Secondly a firm can reduce the final
price offered to the consumer and increase its market thereby superseding its competitors.

Both ways the firm will benefit. The second way would increase its sale and market share while
the first way only tend to increase its revenue. Profit is an important component of any business.
Without profit earning capability it is very difficult to survive in the market. If a firm continues
to earn large amount of profits then only it can manage to serve the society in the long run.
Therefore profit earning capacity by a firm and public motive in some way goes hand in hand.
This eventually also leads to the growth of an economy and increase in National Income due to
increasing purchasing power of the consumer.

Profit Maximization Criticisms

Many economists have argued that profit maximization has brought about many
disparities among consumers and manufacturers. In case of perfect competition it may appear
as a legitimate and a reward for efforts but in case of imperfect competition a firm’s prime
objective should not be profit maximization. In olden times when there was not too much of
competition selling and manufacturing goods were primarily for mutual benefit. Manufacturers
didn’t produce to earn profits rather produced for mutual benefit and social welfare. The aim of
the single producer was to retain his position in the market and sustain growth, thereby earning
some profit which would help him in maintaining his position. On the other hand in today’s time
the production system is dominant by two tier system of ownership and management. Ownership
aims at maximizing profit and management aims at managing the system of production thereby
indirectly increasing the income of the business.

These services are used by customers who in turn are forced to pay a higher price due to
formation of cartels and monopoly. Not only have the customers suffered but also the employees.
Employees are forced to work more than their capacity. they is made to pay in extra hours so that
production can increase.

Many times manufacturers tend to produce goods which are of no use to the society and create
an artificial demand for the product by rigorous marketing and advertising. They tend to make
the product so tempting by packaging and labeling that its difficult for the consumer to resist.
These happen mainly with products which aim to target kids and teenagers. Ad commercials and
print ads tend to provide with wrong information to artificially hike the expectation of the
product.

In case of oligopoly where the nature of the product is more or less same exploit the customer to
the max. Since they form cartels and manipulate prices by giving very less flexibility to the
consumer to negotiate or choose from the products available. In such a scenario it is the
consumer who becomes prey of these activities. Profit maximization motive is continuously
aiming at increasing the firm’s revenue and is concentrating less on the social welfare.

Government plays a very important role in curbing this practice of charging extraordinary high
prices at the cost of service or product. In fact a market which experiences a high degree of
competition is likely to exploit the customer in the name of profit maximization, and on the other
hand where the production of a particular product or service is limited there is a possibility to
charge higher prices is greater. There are few things which need a greater clarification as far as
maximization of profit is concerned

Profit maximization objective is a little vague in terms of returns achieved by a firm in

different time period. The time value of money is often ignored when measuring profit.

It leads to uncertainty of returns. Two firms which use same technology and same factors of
production may eventually earn different returns. It is due to the profit margin. It may not be
legitimate if seen from a different stand point.