Objectives of Financial Management
The efficient use of finance leads to the proper usage of finance by the business concern, and it is an essential aspect of the financial manager’s job. The primary objectives of Financial management can be expressed into two, which are as follows:
- Profit Maximization
- Wealth Maximization
The primary goal of every type of economic activity is to make a profit. Earning profit is the ultimate goal of any business organization. Profit represents the overall commercial effectiveness of any company and reflects the performance of the company. Hence, financial management considers profit maximization as its primary objective. It means, with the help of financial knowledge, businesses, from its economic activity, tries to manage the funds available in such a way that the business earns profit. All the activities thus performed in the organization serves the purpose of profit maximization. Profit maximization entails the following key elements.
- Profit maximization is often referred to cashing per share maximization. It leads to the optimization of business operations in order to maximize profits.
- The ultimate goal of a company concern is to make a profit; so, it explores all potential strategies to boost the profitability of the concern.
- Profit reflects the effectiveness of a firm. As a result, it reflects the complete stance of the corporate organization.
- Profit maximization goals aid in lowering corporate risk.
Arguments in favor of Profit Maximization
- The primary goal is to make a profit.
- Profit is the metric by which a business operates.
- It is the main source of finance.
- Profit lowers the risk of the business concern.
Arguments against Profit Maximization
- Profit maximization leads to labor and consumer exploitation.
- This leads to immoral acts such as corruption, unfair trade practices, and so on.
- Profit maximization goals create inequities among sake holders such as customers, suppliers, public shareholders, and so on.
Drawbacks of Profit Maximization
Profit maximization has the following drawbacks:
- It is ambiguous: Profit is not defined precisely or appropriately in this objective. It generates some unneeded opinions on the earning behaviors of the business concern.
- Profit maximization disregards the time value of money: Profit maximization does not take into account the time worth of money or the net present value of cash inflows. It causes some disparities between the actual cash inflow and the net present cash flow within a given period.
- It ignores risk: Profit maximization does not take into account the risk of the business concern. Risks might be internal or external, and they can have an impact on the whole operation of the firm.
Wealth maximization is a new technique that incorporates the most recent breakthroughs and advancements in the world of business concern. The term wealth refers to shareholder wealth or the wealth of those involved in the firm. Wealth maximization is more welfare based approach and considers that fulfilling the desire of investors through maximization of value of their each share. Wealth maximization is also known as value maximization or net present worth maximization. This objective is a widely accepted concept in the business world.
Arguments in Favor of Wealth Maximization
- Wealth maximization is preferable to profit maximization since the primary goal of a business under this notion is to increase the worth or wealth of its owners.
- Wealth maximization takes into account both the time and the risk of the business concern.
- It ensures optimal resource allocation.
- It ensures society’s economic interests.
Arguments Against Wealth Maximization
- Wealth maximization leads to a prescriptive conception of the business concern, which may not be applicable to modern company activity.
- Wealth maximization is nothing more than profit maximization; it is simply the indirect name for profit maximization.
- Wealth maximization leads to ownership-management conflict.
- Wealth maximization is only possible with the support of the business’s successful position.