Posted in Financial Management
on Jan 2nd, 2015 | 0 comments
OBJECTIVES OF FINANCIAL #management
Before looking into the two main objectives of finance management, let us look at the lighter side of money. Some hilarious quotes that will make your day:
“Money is like a sixth sense – and you can’t make use of the other five without it.” – William Somerset Maugham
“The safest way to double your money is to fold it over and put it in your pocket.” – Kin Hubbard
“Money is the best deodorant.” – Elizabeth Taylor
“If you think nobody cares if you’re alive, try missing a couple of car payments.” – Earl Wilson
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.“ ~Sam Ewing
“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” – Will Smith
“There’s a way of transferring funds that is even faster than electronic banking. It’s called marriage.” — James Holt McGavran
Objectives of Financial Management may be broadly divided into two parts such as:
1. #Profit maximization
2. #Wealth maximization.
The main purpose of any kind of economic activity is earning profit. A business concern operates mainly for the purpose of making profit. Profit has become the yardstick to measure the business efficiency of a concern. Profit maximization is also the out-moded and narrow approach, which aims at, maximizing the profit of the concern. Profit maximization consists of the following important features.
Favorable Arguments for Profit Maximization:
The following important points are in support of the profit maximization objectives of the business concern:
- Main aim is earning profit.
- Profit is the parameter of the business operation.
- Profit reduces risk of the business concern.
- Profit is the main source of finance.
- ##profitability meets the #social needs also.
Unfavorable Arguments for Profit Maximization:
The following important points are against the objectives of profit maximization:
- Profit maximization leads to exploiting workers and consumers.
- Profit maximization may lead to unethical practices, unfair trade practice, etc.
- 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 drawbacks also:
- It is vague: Profit is not defined precisely or correctly.
- 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 to certain differences between the actual cash inflow and net present cash flow during a particular period.
- 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.
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:
- 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.
- 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 exact value of the business concern.
- Wealth maximization considers both time and risk of the business concern.
- Wealth maximization provides efficient distribution of resources.
- It ensures the economic interest of the society.
Unfavorable Arguments for Wealth Maximization:
- Wealth maximization may not be suitable to present day business activities which are oriented towards profit derivation.
- Wealth maximization is nothing, it is also profit maximization, and it is the indirect name of the profit maximization.
- Wealth maximization creates ownership-management controversy.
- Management alone enjoys certain benefits.
- The ultimate aim of the wealth maximization objectives is to maximize the profit.
- Wealth maximization can be triggered only with the help of the profitable position of the business concern.
- Is Profit Maximization an Appropriate Goal
- Scope of Financial Management
- Costing and Profitability