Aside from the love and passion that pushes an entrepreneur into business, another reason why an entrepreneur would most definitely want to go into business is to make a profit, and of course lots of it too. That's why I have chosen to share the topic, of profit maximizing today. There is a difference between running a profitable business and being able to maximize profit, but the ultimate goal for all business owners is to be able to achieve maximum profitability while looking out for a positive brand reputation.
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What exactly is profit maximization?
It is looking for the most efficient way to increase profits, and generally improve the overall financial health of a company. The process of profit maximization is aimed at increasing profit to the greatest extent possible and for this to be done, there is a need for an optimal level of output with which total revenue and total cost are at their highest.
Put in another way, we could say profit maximization has to do with an increase in revenue and a decrease in cost to achieve the highest possible profit level. To achieve this, it means companies must be able to determine the point at which marginal revenue equals marginal cost. This implies that additional revenue generated through the production of one more unit is equal to the additional cost of having that unit produced. With profit being maximized significantly, businesses will be able to, reinvest in operations, expand offerings, and also increase their competitive edge.
Profit maximization has a formula with which it functions, this formula is a basic principle that businesses could use to determine the optimal level of output that generates the highest profit, the said formula takes into consideration, the relationship between margin revenue, marginal cost, total revenue, marginal revenue curve, and level of output.
Margin revenue is an additional revenue generated through the act of selling above one product unit, marginal cost on the other hand, is the additional cost incurred by producing one more product unit, while total revenue is the overall revenue that is generated through selling a particular number of product units.
For the optimal level of output for profit maximization to be determined, a business will need to produce at a point where marginal revenue is equal to marginal cost. When it gets to this point, it means the business is producing the last unit that generates more revenue than the cost of producing it, resulting in maximum profit
Expressely, here is the formula for profit maximization.
Profit = Total Revenue - Total cost
Or
Profit = (Price X Quantity) - Total Cost
Bear strongly in mind that, price is the selling price per unit quantity = the level of output Total Cost is the total cost of producing the quantity sold.
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It would interest you even more to know that, there is a thing called wealth maximization, which is not the same as profit maximization. Wealth maximization is focused on long-term financial success, considering the time value of money as well as the cost of capital. While profit maximization is a short-term strategy that aims to increase profit speedily. Profit maximization is highly important for businesses, wealth maximization is a more comprehensive approach to the actualization of financial success.
For a business to effectively maximize profit, it has to look for an optimal price and output level. This can be achieved through; doing research, analyzing costs, and making use of value-based and intelligent pricing strategies.
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