This article looks at how private business organizations decide on their business objectives. The most common business objectives for businesses in the private sector are concerned with:
1. Survival.
2. Growth.
6. Maximizing short-term sales revenue.
7. Maximizing shareholder value.
8. Corporate Social Responsibility (CSR).
Profit satisficing
Profit satisficing means aiming to achieve enough profit in order to live a comfortable life and keep the owners happy. But, not aiming to work long hours to earn as much profit as possible at the expense of free time and physical and mental health. Profit satisficing means being comfortable with a certain amount of profit, although it does not have to be maximized at all cost.
Once a satisfactory level of profit has been reached, the owners consider other things as a priority.
This objective is often very common among owners of small businesses who want to live comfortably and enjoy time with their families, but do not want to work too much in order to earn even more money.
Reasons for profit satisficing include less stress, less management responsibilities, being less busy, avoiding risk and problems with overexpansion, not trying to gamble to see whether the business will be successful at the maximum use of resources or having other long-term goals instead of quick high returns.
Also, some owners may not want to expand output to the point where profits are maximized because more workers need to be hired, more decisions need to be made, and more hours they need to work. They will be just happy with a satisfactory profit level.
Examples of the profit satisficing objective
1. Earn USD$60,000 after TAX every year by working five hours a day.
2. Earn less than USD35,000 to avoid being in the higher TAX threshold, therefore pay the least TAXes possible.
Profit maximization
All stakeholders in a business are working for some sort of reward. Profit is essential for two reasons – rewarding investors for investing their money into the business and for financing further growth of the business. Also, the idea of generating profit in the future is necessary to persuade entrepreneurs to take risks and start up new businesses.
Profit is the difference between total revenue earned by the business from selling its products and total costs of producing those products. Profit maximization is producing at that level of output where this difference is the greatest possible.
For many businesses and their owners, maximizing profit is the most important objective trying to produce and sell the level of output where difference between total revenue and total costs is the largest.
A business which is not maximizing profit, would be a missed opportunity as there are millions of other businesses that do so for their owners.
Limitations of the profit maximization objective
There are many considerable shortcomings of this corporate objective:
Increased competition. When companies in a certain industry suddenly achieve very high profits in the short-term, it will encourage competitors to also enter into that market. Therefore, survival and earnings in the long-term may be jeopardized.
Operating at a loss just to gain market share. Many businesses seek to maximize sales revenue and steal away customers just to grab the greatest possible market share. These businesses aim to establish themselves in new markets rather than to maximize profits. Ideally, the business would expect to make a certain rate of satisfactory profit from each sale, rather than operate at a loss at all.
Profit is less important than free time. Many owners of smaller businesses prefer more leisure time and safeguard their independence. Therefore, achieving higher profits are not their top priority.
Return of Capital Employed (ROCE). Many business analysts evaluate company performance and compare with other companies using the rate of Return on Capital Employed (ROCE) to see how effectively managers are using the company’s capital. Therefore, measuring total profit figures becomes less important.
Stakeholders’ impact. Profit maximization is the preferred objective of the business. However, maximizing profit is not a main objective for other business stakeholders. Business managers want higher monthly salaries and better benefits, production workers want safer work environment and job stability while local residents do not want the business to pollute the environment. All of the demands from other stakeholders come with the price making running of even the most profitable business to be modified, yielding lower profit levels in the longer term.
How much profit is enough? It is quite difficult to assess what the amount of profit at the maximum level is. With constant changes in the market conditions resulting in prices adjustments or the loss of customers, it may be almost impossible to predict the maximum profit.
Examples of the profit maximization objective
1. Increase Net Profit Before Interest and TAX by 25% in the next 12 months.
2. Increase the profitability of top selling products by 5% in 2022.
3. Achieve at least USD$10,000 profit from each of the newly launched products this year.
4. Increase Gross Profit Margin (GPM) and Net Profit Margin (NPM) by at least 5% in Q4 of 2021.
Other objectives related to profit may include:
– Sacrificing short-term profit maximization for stability of long-term profit.
– Allowing the business to operate at a loss in the short-term.
