PROFIT MAXIMIZATION: A STRATEGIC TOOL FOR SURVIVAL OF BUSINESSES IN NIGERIA
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As we all know the objective of any business venture is to maximize profit. Hence all the decisions with respect to new projects, acquisition of assets, raising capital, distributing dividends e.t.c are studied for their impact on profits and profitability. Profit maximization theory is based on profits and profits are a must for the survival of any business. Therefore, this research work focused on the effectiveness of profit maximization on Dangote Cement Plc as a case study. The data used was gathered with the aid of a questionnaire and Chi-Square(x2 ) method of data analysis was applied in analyzing the data. Based on the findings, the research reviewed that profit maximization occurs with efficient and effective use of resources by the employees in an organization. It also brings to the fore an organizations Strengths, Weaknesses, Opportunities and Threats in an attempt to be relevant and meet customer needs. It was also discovered that cost volume profit analysis is the technique that is being used at Dangote Cement Plc when planning for profit cost. Hence, it is recommended that Business owners and Organizations interested in maximizing profit must review their cost structure regularly, must be diligent in cutting frivolous cost and boost productivity amongst employees.
- Background of the study
The ultimate goal of every firm in business is profit i.e. (Profit Maximization) and cost minimization in order to maximize shareholder wealth. Many industries today are facing problems due to the expansion through increases sales and the introduction of new product. Some on the other hand are facing problem of contraction owing to the introduction of substitute material. It is vital that management should be in position to plan for these changing levels of activities. Apart from the problem of contraction and expansion during economic depression, an enterprise may be faced with the alternative of closing down or selling it at a price below the total cost. Hence profit planning and control becomes difficult as a result of product offered and the action of competitor. In order to solve the problem created by the above situation profit, planning, cost, and their behaviour at different separating level, one of the most important tools developed by accountants to assist management in meeting the challenges is cost volume profit analysis. According to I.M Pandey the analytical technique used to study the behavior of profit in response to changes in volume, cost and price, is called “Cost volume profit analysis” It is a device used to determine the usefulness of the profit planning process of the firm. The entire field of profit planning has become associated with the cost volume profit relationship in organization. In micro-economics course, profit maximization is frequently cited as the goal of the firm; Profit maximization stressed the efficient use of capital resources but it is not specific with respect to the time frame over which profit are to be measured; Profit maximization function largely as a theoretic goal with economist using it to prove how firms behave rationally to increase profit. Unfortunately, it ignores many real-world complexities that financial management firms must deal everyday with. Two major factors not considered by the profit maximization are Uncertainty and timing.
1.2 STATEMENT OF THE PROBLEM
The rising magnitude of the incessant profit or loss in Nigeria business organization over the year has become a thing of concern to managers; government, Policymakers, academia, entrepreneurs, financial analysis, economist and other stakeholders in the country’s economy. Various studies have been carried out to explain with empirical evidence, the factors driving profit and loss in business organization
The challenges facing most firms is numerous particularly during the period of economic depression or recession characterized by high liquidation of many companies, merger and acquisition, low technological powers, shortage of foreign exchange to buy needed raw material, high cost of production, erratic powers supply, high volume of imported goods and the advanced state of competition has affected drastically the maximization profit and cost maximization in most business organization.
In a competitive world the key factors are cost price turnover and profit and these are factors which no business organization can ignore.
- Management is faced with the problem of how to make effective and efficient use of their available scarce resources in order to achieve the objective of profit maximization.
- Most management and organization lack under-standing on the importance of cost minimization as an effective tool or technique that has help in the sustainability on most business organization.
- Most organization is faced with high cost of production which has led to inefficient utilization of the cost volume profit analysis technique
1.3 OBJECTIVE OF THE STUDY
Profit planning and control are essential ingredients of every successful business in the world. The efficiency of management is measured by the amount of profit or loss in a given accounting year. The general objective of this study therefore will be;
1) To find a way of making use of scarce resource in order to achieve profit maximization.
2) To highlight the importance of profit using cost volume profit analysis over other forms of technique.
3) To identify the problems encountered in the economy that leads to lack of practical application of profit maximization.
4) To evaluate the extent to which the use of profit maximization on Dangote Cement Plc has been efficient
1.4 RESEARCH HYPOTHESES
- HO: Cost volume profit analysis as a tool for profit planning and control is not used in Dangote Cement Plc.
H1: Cost volume profit analysis as a tool for profit planning and control in Dangote Cement Plc.
- HO: The application of cost volume profit analysis has not helped Dangote Cement Plc to be efficient and effective in its operations.
H1: The application of cost volume profit analysis has helped Dangote Cement Plc to be efficient and effective in its operations.
- HO: Dangote Cement Plc does not employ other techniques in profit planning and control apart from cost volume profit analysis.
H1: Dangote Cement Plc employs other techniques in profit
Planning and control apart from cost volume profit analysis.
1.5 SIGNIFICANCE OF THE STUDY
It is hoped that this study will be of importance to students (Accounting, Banking and Finance, Business Administration, Economics etc) staff and management of business organization, the individuals in banking profession and the shareholders of the companies.
The students are to be aware of the role played by profit maximization in business organization. Profit maximization is an essential tool in all business organization.
In a competitive world, the key factors are cost, price turnover and profit, and these are factors which no business organization can ignore. Therefore, the significance of the study is as follows:
- How the study of profit maximization and cost minimization of Dangote Cement Plc knows how their profit margin is increasing over time.
- It is useful to student in schools since it will serve as a source of reference to them in the nearest future.
- It is useful to the state since it is used by government in making decision for improvement of the states.
- It is useful to the economy as a whole since it is used by policy makers to maximize profit in the economy.
- It is a basis for understanding, contribution, margin pricing, related short run decisions and transfer pricing.
1.6 SCOPE AND LIMITATION OF THE STUDY
This study is to analyze the effectiveness of profit maximization tool in business growth in Nigeria as a tool for profit planning and control in general but with particular reference to Dangote Cement Plc. This is with the view of finding out how the company, has been able to manage cost in order to maximize profit. The study of the effectiveness of profit maximization as strategic tool in business growth in Nigeria using Dangote Cement Plc., Lagos State. In carrying out this study, I was faced with number of constraints some of which are:
FINANCE: Inadequacies of funds affected expenses on distribution and collection of questionnaires to respondent and from respondents; printing of questionnaires and other transport expenses in conducting the research.
TIME: There is need to observe lots of protocols in respects to levels of management before the collection soaring that the primary data collected would be dependable to some extent, also the rationing of time so as to accommodate my other courses.
Nevertheless, these constraints were taken care of and with limited errors and variances.
1.7 DEFINITION OF TERMS
- BREAK EVEN POINT:This is the level of operations at which a business revenue and expired costs (expense) are exactly equal.
- BUSINESS:A commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities. It is also the activity or the organized effort of an individual or a group of individuals making use of resources in the environment to provide and distribute goods and services at a profit.
- COST:Cost denotes the amount of money that a company spent on the creation of production of goods or services. It does not include the mark-up for profit; it is also total money time and resources associated with a purchase or activity.
- DIVIDEND:It is a taxable payment declared by a company’s board of directors and given to its shareholders out of the company’s current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property.
- EFFICIENCY:Efficiency is the comparison of what is actually produced or performed with what can be achieved with the same consumption of resources (money, time, labour etc). It is an important factor in determination of productivity.
- INVESTMENTS:Is an asset or an item that is purchased with the hope that it will generate income or appreciate in the future. In economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
- MARKET: Market is a regular gathering of people for the purchase and sale of provisions, livestock, and other commodities. It is actual or normal place where forces of demand and supply operate, and where buyers and sellers interact (direct or through intermediaries) to trade goods, services, or contracts of instrument, for money or barter.
- ORGANISATION:Is an elements or process of management concerned with the growth or change of the structure. It is a process of dividing and accountability within and external to the sections, the whole being coordinated to achieve the overall objectives.
- PRODUCTS: Product is an article or substance that is manufactured or refined for sale. It is also a good or services that most closely meets the requirement of a particular market and yields enough profit to justify its continued existence.
- PROFIT:The surplus remaining after total costs are deducted from total revenue and the basis on which tax is computed and dividend is paid. It is the best known measure of success in an enterprise.
- PROFIT MARGIN:The amount by which revenue from sales exceeds costs in a business. It is also a ratio of profitability calculated as net income divided by revenues or net profits divided by sales.
- RESOURCES:Resource is an economic or productive factor required to accomplish an activity, or as means to undertake an enterprise and achieve desired outcome. Three most basic resources include land, labour and capital; other resources include; energy, entrepreneurship, information, expertise, management and time.
- SALE MIX: This can be defined as the relative proportions in which a company’s products are sold. The idea is to achieve the combination or mix that will yield the greatest amount of profits.
- SHORT RUN:This is a period during which the quantity of at least one input is filled and the quantity of the other input can be varied.
- TRANSFER PRICING:This is the rate of prices that are utilized when selling goods or services between divisions.
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.
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