To create a real forex account for free, click here
Every organisation has one objectives or another they intend to achieve. These objectives Are clearly achievable goals and are derived from its vision and mission statement of the Organisation. There is little agreement in the literature as to what objectives of firms are Even what they ought to be. However, most financial management textbooks make the Assumption that the objective of a limited company is to maximize the wealth of its Shareholders. The reasons for this assumption and the arguments against it will now be Presented. Vision is the long term objectives of a firm and it must align to mission statement. Examples here include the pursuit of market leadership at any cost, even profitability. This may arise because management assumes that high sales equal high profits which is Not necessarily so. In practice, the goals which a company actually pursues are affected to A large extent by the management. As a last resort, the directors may always be removed By the shareholders lack of voting power and information. These companies can, Therefore, be dominated by the management.
FINANCIAL OBJECTIVES OF A Firm
There are many objectives which a firm can pursue. It is generally accepted that there Should be one overall objective with all other objectives giving support for this overall Objective can be achieved. However, this objective serves as the real objective of the Organisation and thus, for a business organisation, a financial objective is generally taken As the overall objective.
Financial Objectives: The financial objectives of a business organisation include, among others, the following:
a. Profit maximization
b. Profitability maximization
d. Long-term stability
f. Corporate wealth maximization
g. Shareholders wealth maximization
These financial objectives are further discussed as follows:
Profit Maximization Objective
This objective refers to accounting profits and it means that financial managers should Attempt to make as much profits as possible. The essence of profit is to be able to finance All viable and to meet other exogenous costs of the firms. Financial managers tend to Pursue this objective because of the fact that the ordinary shareholders are, in law, the Owners of the organisation. They have ultimate control of the company and take residual Profits.
However, profit maximization is a good objective but it has its deficiencies.
• A company, for the purpose of expanding its operation may raise additional capital But the additional profits generated may not justify the additional capital obtained. In This case, profits may be rising but earnings per share may be falling.
ii. A company may be earning short-term profits at the expense of long-term profitability. For example, management may be tempted to cut down say, research and development expenditure in a particular year. This may increase the profits of that year but jeopardize future sales and profitability.
iii. Profit maximization, as an objective, ignores risk. Risk, particularly business risk, is an unavoidable fact of business life as business organisation operates into the future.
Profitability Maximization Objectives The economist‟s assumption of profit maximization would seem to be very reasonable. Then, the company can be thinking of maximization of profit and even in companies Owned by shareholders but run by non-shareholding managers, where the entrepreneur is In full managerial control of the firm, as in the case of a small owner-managed company Or partnership where the manager is serving the company‟s (i.e. the shareholders‟) Interests, we might expect that the profit maximization assumption should be close to the Truth. However, some writers have suggested that objectives other than profit maximization Might be pursued by firms. Managers are paid to make the decision about price and Output, but it is the shareholders who expect to benefit from the profits. Managers, it is Argued, will not necessarily make pricing decision that will maximize profits, because:
a) They have no personal interest at stake in the size of profits earned, except in so Far as they are accountable to the shareholders for the profits they make; and
b) There is no competitive pressure in the market to be efficient, minimize costs and Maximize profits. Given the divorce of management from ownership, it has been suggested that price and Output decisions will be taken by managers with a managerial aim rather than the aim of Profit maximization, within the constraint that managers must take some account of Shareholders‟ interest because they are formally responsible for them and so are Accountable to shareholders for their decisions.