OBJECTIVES OF FINANCIAL MANAGEMENT
Objectives of Financial Management may be broadly divided into two parts such as:
- Profit maximization
- Wealth maximization.
Profit Maximization: Main aim of any kind of economic activity is earning profit. A business concern is also functioning mainly for the purpose of earning profit. Profit is the measuring technique to understand the business efficiency of the concern. Profit maximization objectives help to reduce the risk of the business.
Favorable Arguments for Profit Maximization
The following important points are in support of the profit maximization objectives of the business concern:
(i) Main aim is earning profit.
(ii) Profit is the parameter of the efficiency of business operation.
(iii) Profit reduces risk of the business concern.
(iv) Profit is the main source of finance.
(v) Profitability meets the social needs also.
Unfavorable Arguments for Profit Maximization
The following important points are against the objectives of profit maximization:
(i) Profit maximization leads to exploiting workers and consumers.
(ii) Profit maximization creates immoral practices such as corruption, unfair trade practice,
(iii) Profit maximization objectives leads to inequalities among the stake holders such as customers, suppliers, public shareholders, etc.
Drawbacks of Profit Maximization
Profit maximization objective consists of certain drawback also:
(i) It is vague and ambiguous: In this objective, profit is not defined precisely or correctly. It creates some unnecessary opinion regarding earning habits of the business concern.
(ii) It ignores the time value of money: Profit maximization does not consider the time value of money or the net present value of the cash inflow. It leads certain differences between the actual cash inflow and net present cash flow during a particular period.
(iii) It ignores risk: Profit maximization does not consider risk of the business concern. Risks may be internal or external which will affect the overall operation of the business concern.
(iv) It ignores the financing aspect of decision.
Wealth maximization is one of the modern approaches, which involves latest innovations and improvements in the field of the business concern. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern.
Wealth maximization is also known as value maximization or net present worth maximization. This objective is a universally accepted concept in the field of business.
Favorable Arguments for Wealth Maximization
(i) Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders.
(ii) Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred for the business operation. It provides extract value of the business concern.
(iii) Wealth maximization considers both time and risk of the business concern.
(iv) Wealth maximization provides efficient allocation of resources.
(v) It ensures the economic interest of the society.
(vi) It implies long term perspective as share holders’ wealth is reflected in the market price of the share and market price of a share reflects all expected future benefits flowing from firm to its shareholders.
(vii) It implies that the market price of a share is linked to three basic financial decisions ie investment decisions, financing decisions and dividend decision.