Part 7&8

Generally, when it comes to identifying the primary goal of most companies, they tend to say that it is to
maximize their profits as they believed that profit margin is the key indicator of their company’s success.
However, when we talked about profit policy, it is made up of modern businesses that are rejecting the
commonly accepted primary goal as they have other objectives more than profit maximization.
Nevertheless, this does not imply that companies do not pursue on gaining profit, they only have several
reasons to do so and these are as follows:
 Maintaining Business Goodwill – Usually, any firm is built on the needs of its customers and it is
through maintaining their goodwill where they can meet the high-quality of customer service
that can help them with the company’s success. However, in order to maintain such, businesses
must limit their profits in order to preserve their goodwill as keeping profits low allows
businesses to seek the goodwill of their company as such helps them to Improve the service
quality faster than other companies.
 Wage Consideration – Normally, in one company, part of their basis in providing wages and
salaries to its employees is the profit they are gaining. Therefore, larger amount of profits only
indicate that company has the capability to pay larger amount of wages to its employees.
Therefore, to lessen that possibility, companies are limiting their profits at a reasonable level
only. Since there are some labor associations that will demand higher amount of wages,
bonuses, and the like, companies opts as well to restraints their profit.
 Avoiding High Taxation and Government Intervention – As we all know, in a general setup,
taxes that are being paid by the companies are based with their sales or sometimes with their
profits. With that, we can say that having higher profits can be fatal to businesses as once the
government becomes aware to such they can impose regulations such as imposing larger taxes
for businesses as well as creating price control to the products offered to the market. Therefore,
since business are aware to all that possibilities, they tend to limiting their profit and focus on
achieving their other objective rather than maximizing their profit.
 Avoiding Risk - Part of the goal of most business is to avoid risk but in order to meet this goal
companies must limit their profits first. This is because upon utilizing the profit maximization
strategy, there are managers that require to make a variety of uncertain and difficult managerial
decisions. With that, the loss of providing wrong decision is high. Therefore, the tendency is
company might be affected negatively. However, there are some businesses that needs to
concentrate on limiting their losses. As a result, the avoidance of loss, rather than the
maximization of profit, is the governing principle of their company.
 Obstructing Potential Competition – It is indeed that competitions increases once the
competitors become aware that the market is profitable and as a result they can immediately
conquer it resulting to have new entrants in such. With that, the more competitors a company
has, the more that its profitability would lessen because the market will be divided already and
the customers has already more options where to buy certain products. Hence, most companies
have restricting its profit policy in order to have no competitors that will likely to enter the
market.
 Goal of domination and Leadership in the market – Many firms have focused more on
dominating the market and have leadership to it rather than gaining more profit. However, in
order to achieve that they need to maximize their sales volume and produce more product lines.
With that, a suitable level of profit that is commensurate with the amount of capital invested,
labor employed, and volume of goods generated is required to achieve leadership in the
industry.
 Enlightened Self-interest of Survival – Securing position in the market is also one of the main
objectives of many firms. They believed that once they already secured position in the market,
there would generate a regular and steady stream of revenue over the long term. In order to
achieve that, companies need first to limits their profits and work for them to ensure their own
survival.
 Idealism and Service Motivation – Most companies tend to take some approach that would
lead them in avoiding profit maximization while focusing on providing greater and better
services. Thus, sometimes they are more focused on the concept of offering more jobs to
employees with larger wages resulting to considering the wellbeing of their employees as well,
as they believed that treating the employees’ right can contribute more success to the company
itself.
 Liquidity Preference – there are other companies that opt to prioritize their liquidity rather than
profit maximization because they believe that a firm's capital stability is more important. When
we say liquidity preference, it refers to the preference for holding cash to cover daily
transactions. With that, the balance sheet's current asset to current liability ratio is the first
thing that catches people's eyes. The company concerns retain high cash and little profit in order
to provide capital soundness which can also attract more investments.
The several reasons on making and limiting profit policy has been mentioned above. However, before
making such and deciding what profit policy should be implemented, there are two major problems that
can arise. The first one is the reasonable rate of profit and the second one is how they will be able to
determine it.
Before companies make a policy regarding on limiting their profit, companies need first to identify what
reasonable rate of profit they want to target because with that, they will be able to know on how far
should they proceed. Companies have considered it as part of the problem because it is crucial to
identify the right rate needed as once the company failed to do so, there might be a negative impact to
the company. Additionally, there are many options where they can base the rate of their targeted profit
like the target rate of return of investment or even in the sales or demands of the companies. Further,
to lower its desired profit rate, the company should also take a number of environmental concerns into
account. Limiting the profit target prevents the shareholders from demanding higher dividends, the
wage earners from demanding higher wages, the government from imposing high taxes, the customers
from demanding lower prices, the suppliers from demanding higher rates, and the reputation of the
company from being harmed.
Moreover, when it comes to the second major problem which identifying the way on how to determine
it, this becomes part of their problem as just like what have mentioned above, there are several ways on
where company can base their targeted profit. The company must take into account the profit rates
attained by other businesses in the same sector, the historical profit rates attained by the company, the
profit rates required to raise internal funding for replacement and expansion, and the profit rates
required to attract equity capital.

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Generally, when it comes to identifying the primary goal of most companies, they tend to say that it is to

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