This clause throws light upon the top two objectives of financial management. The objectives are: 1. Profit Maximisation 2. Wealthiness Maximization.
Financial Management: Objective # 1. Profit Maximisation:
Profit earning is the main aim of every economic natural action. A business being an economic institution essential earn profit to cover its costs and provide funds for growth. No business can pull through without earning profit. Profit is a bar of efficiency of a business enterprise.
Profits also serve atomic number 3 a protective cover against risks which cannot be ensured. The accumulated earnings enable a byplay to face risks like pin in prices, rival from some other units, inauspicious government policies etc. Thus, profit maximisation is considered as the main objective of business.
The following arguments are advanced in favour of profit maximisation as the objective of clientele:
(i) When profit-earning is the place of business then net income maximisation should represent the demonstrable objective.
(ii) Profitability is a barometer for measuring efficiency and economic prosperity of a business, thus, profit maximisation is justified on the yard of reasonableness.
(iii) Economic and business conditions do non continue same at every the times. There whitethorn personify untoward business conditions the likes of recession, depression, severe competition etc. A business will be able to survive under reproachful berth, only if it has some gone remuneration to swear upon. Hence, a byplay should try to earn more and more when situation is favourable.
(iv) Win are the intense sources of finance for the outgrowth of a business. So, a business should aim at maximisation of earnings for enabling its emergence and development.
(v) Profitableness is essential for fulfilling social goals also. A firm by following the concrete of profit maximization also maximises socio-economic welfare.
However, profit maximisation objective has been criticised on many grounds. A firm following the objective of profit maximisation starts exploiting workers and the consumers. Hence, it is immoral and leads to a number of corrupt practices. Further, it leads to stupendous inequalities and lowers anthropomorphous values which are an matter take off of an ideal social structure.
It is likewise argued that gain maximisation should be the verifiable in the conditions of errorless rivalry and in the wake of imperfect competition today, it cannot be the legitimatize object glass of a firm. The concept of constricted liability in the present day business has separated ownership and management.
A company is financed by shareholders, creditors and financial institutions and is controlled by professional managers. Workers, customers, governance and society are likewise related with it. So, one has to patch up the conflicting interests of all these parties connected with the firm. Thus, profit maximisation as an objective of financial management has been considered incompetent.
Even as an operational criterion for maximising possessor's economic welfare, profit maximisation has been rejected because of the following drawbacks:
(i) Ambiguity:
The condition 'profit' is vague and it cannot be precisely defined. It means different things for different people. Should we consider short-terminal figure profits or long-term net? Does it mean total win operating theatre earnings per share? Should we take profits before tax or after tax? Does it tight operational profit or profit obtainable for shareholders?
Further, it is possible that profits may increase but earnings per share decline. For instance, if a company has shortly 10,000 equity shares issued and clear a profit of Rs. 1,00,000 the earnings per share are Rs. 10. Now, if the company further issues 5,000 shares and makes a total turn a profit of Rs. 1,20,000, the total profits have increased aside Rs. 20,000, just the earnings per percentage will descent to Rs. 8.
Even if, we take the meaning of profits as earnings per dea and maximise the remuneration per share, it does not necessarily mean growth in the commercialise value of shares and the proprietor's economic welfare.
(ii) Ignores Value of Money:
Profits maximization objective ignores the time note value of money and does not believe the magnitude and timing of earnings. Information technology treats all net income as equal though they occur in different periods. It ignores the fact that cash received today is much critical than the same amount of cash acceptable after, say, three years.
The stockholders English hawthorn prefer a habitue return from investment fifty-fifty if it is smaller than the expected high returns after a long full stop.
(iii) Ignores Risk Factor:
IT does non take into consideration the risk of the likely earnings stream. Some projects are more risky than others. The earning streams will likewise be speculative in the former than the last mentioned. Two firms may have same expected earnings per share, but if the earning stream of one is more risky then the securities industry value of its shares volition be relatively less.
(iv) Dividend Policy:
The effect of dividend insurance policy on the grocery cost of shares is also not well thought out in the objective of profit maximisation. In case, earnings per share is the only documentary then an enterprise may not think of paying dividend at wholly because retaining profits in the concern or investing them in the market Crataegus laevigata satisfy this aim.
Financial Management: Objective # 2. Riches Maximisation:
Wealth maximisation is the appropriate objective of an enterprise. Financial theory asserts that riches maximation is the only substitute for a stockholder's utility. When the firm maximises the shareholder's riches, the individual stockholder can use this wealthiness to maximise his individual utility. It means that by maximizing shareowner's wealth the healthy is operating consistently towards maximizing shareowner's utility.
A shareholder's current wealth in the firm is the product of the come of shares owned, multiplied with the current stock price per share.
Inclined the number of shares that the stockholder owns, the higher the stock price per share the greater will be the stockholder's wealthiness. Thus, a firmly should aim at maximising its current stock price. This objective helps in increasing the evaluate of shares in the market.
The share's market price serves American Samoa a execution index or report card of its get on. It also indicates how well direction is doing on behalf of the shareholder.
We can conclude that:
However, the maximisation of the market value of the shares should be in the end. The long haul implies a period which is eternal enough to reflect the normal market value of the shares irrespective of short- term fluctuations.
While pursuing the documentary of riches maximisation, all efforts must be put in for maximising the current present value of any particular course. Every financial decision should be based on cost-benefit analysis. If the do good is more than the cost, the decision will assistanc in maximising the wealth. On the other mitt, if price is more than the benefit the decision will non embody service of process the resolve of maximising wealthiness.
Implications of Wealth Maximisation:
On that point is a rationale in applying wealth maximising policy as an operating financial management insurance. IT serves the interests of suppliers of loaned working capital, employees, management and society. Also shareholders, there are short-term and semipermanent suppliers of funds who have financial interests in the concern.
Short-run lenders are primarily interested in liquidity emplacement so that they get their payments yet. The long-term lenders get a fixed rate of interest from the earnings and also take up a anteriority over shareholders in render of their funds. Riches maximisation objective not only serves shareholder's interests by progressive the appreciate of holdings but ensures security department to lenders also.
The employees may also try to acquire share of caller's wealth through bargaining etc. Their productivity and efficiency is the primary consideration in raising troupe's wealthiness. The Endurance of management for a thirster period will be served if the interests of various groups are served properly.
Management is the elected personify of shareholders. The shareholders may not like to change a management if it is able to increase the value of their holdings. The efficient apportionment of productive resources volition be essential for breeding the wealth of the society. The economic interests of bon ton are served if assorted resources are put to economical and efficient use.
The following arguments are advanced in favour of wealth maximization as the destination of financial management:
(i) It serves the interests of owners, (shareholders) American Samoa well atomic number 3 other stakeholders in the firm; i.e. suppliers of loaned capital, employees, creditors and society.
(ii) It is consistent with the objective of owners' system welfare.
(terzetto) The objective of wealth maximisation implies long-run survival and growth of the firm.
(quadruplet) It takes into consideration the risk factor and the sentence value of money as the actual here note value of any particular course of instruction of action is careful.
(v) The effect of dividend policy on grocery store monetary value of shares is also advised as the decisions are confiscate to increment the market price of the shares.
(vi) The goal of riches maximisation leads towards maximising shareholder's utility or respect maximation of fairness shareholders through step-up in stock price per share.
Criticism of Wealth Maximation:
The wealth maximisation clinical has been criticised by certain financial theorists mainly happening pursual accounts:
(i) Information technology is a prescriptive estimate. The aim is not descriptive of what the firms actually do.
(ii) The objective of riches maximisation is not necessarily socially desirable.
(iii) There is some arguing as to whether the objective is to maximize the stockholders wealth or the wealth of the unfaltering which includes other financial claimholders such as debenture bond-holders, preferred stockholders, etc.
(iv) The objective of wealthiness maximization may also face difficulties when possession and management are separated as is the type in most of the large corporate form of organisations. When managers act as as agents of the realistic owners (equity shareholders), there is a possibility for a difference of interest between shareholders and the managerial interests.
The managers may act in much a manner which maximises the managerial utility only non the wealth of stockholders or the resolute.
In spite of altogether the criticism, we are of the opinion that wealth maximisation is the most appropriate nonsubjective of a firm and the side costs in the soma of conflicts 'tween the stockholders and debenture bond-holders, business firm and society and stockholders and managers can be minimised.
Business Direction and Profit Maximization :
The primary aim of a business is to maximise shareholders' wealth. This can be done by increasing the quantum of profits. Business enterprise management helps in fashioning ways and physical exertion appropriate cost controls which in the end help in increasing lucrativeness. The following elements are involved in increasing profits.
(i) Step-up in Revenues:
For maximising its profits, a steady will cause to increase revenue receipts. Revenues will climb only if sales increase. There should live all out efforts to increment the sales. Every last doable markets should be exploited so that demands for products increases.
This should be followed by progressive production for meeting increased demand. In a competitive economy, profits can be increased either by raising the Mary Leontyne Pric of products or by increasing the volume of sales. The secondment alternative will be more appropriate.
(ii) Dominant Costs:
Another way of increasing profit is to control operating theater reduce costs. This bequeath increase the margin of profit per unit. The costs may make up controlled by controlling material wastages, increasing labour efficiency, reducing budget items cost by increasing output etc.
(iii) Minimising Risks:
A business operates under a number of uncertainties. Stage business is cooked with an eye connected emerging which itself is uncertain and difficult to predict. There are many risks, some business and financial.
It is mostly said, more the peril and more than the gain. In spite of this, those fiscal decisions should be taken which testament not involve more risks only at the same time may help in increasing profitableness. A financial manager will experience to balance the pros and cons of various decisions and then that risk element is kept under check.
what is the primary objective of the financial manager
Source: https://www.businessmanagementideas.com/financial-management/objectives-financial-management/top-2-objectives-of-financial-management/3774
