Ambiguity

One practical difficulty with profit maximization criterion for financial decision making is that the term profit is a vague and ambiguous concept. It has no precise connotation. It is amenable to different interpretations by different people. To illustrate, profit may be short-term or long-term, it may be total profit or rate of profit, it may be before-tax or after-tax, it may return on total capital employed or total assets or shareholders equity and so on. If profit maximization is taken to be the objective, the question arises, which of these variants of profit should a firm try to maximize? Obviously, a loose-expression like profit cannot form the basis of operational criterion for financial management.

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