What forms the Basis for your Investment Decisions? Profit seeking is the ultimate aim of corporate management and the finance manager acts as the anchor point of the management structure. He has to provide specific inputs into the decision-making process, with respect to profitability. Corporate Investment Decisions Cost control What are the Cost Centres? It is the finance manager’s responsibility to have an eagle’s eye on rising costs by continuously monitoring the cost centers of his organization. Production department where there is always a need for additional resources or inflow of funds, should be his first target of contol. Costs are incurred by each and every department of an organization, namely, the production, marketing, personnel and of course finance and accounting. It is a difficult task to control the rising costs. That is the reason why, big corporate companies go for annual budget formulation at the start of the year and reformulates the finance plan by comparing actual with the projected figures. This kind of evaluation helps the firm to fix responsibilities for various centers of operation. Resource Allocation A finance manager is the first person to recognize rising costs for supplies or production, and he can make immediate recommendations to the management to bring back costs under control. While cost control talks about allocating resources to different responsibility centers in the desired proportion, cost reduction focuses on conserving the resources. Cost reduction can be achieved through modifying product and process designs, cutting down throughput time, doubling labor productivity, mass customization, standardistion etc., Pricing Price Fixation It is always a joint venture between marketing and finance departments when it comes to price fixation of products, product lines and services. Pricing decisions are important in that, they affect market demand and the company’s competitive stand in the market. Pricing strategies have to be evolved in the wake of existing competitor strategies and market preference. The demand forecast is the prerequisite factor of the production process and in-depth market analysis and understanding is inevitable on the part of the executives. Future Levels of Profit The finance manager is also responsible for charting out the future levels of profit, based on the relevant data available. He has to consider the current costs, likely increase in costs and likely changes in the ability of the firm to sell its products at the established selling prices. So, it becomes clear that, such market evaluation cannot be periodical, as the market is highly dynamic and has to be done in a day-to-day basis. Before a firm commences a project, its discounted future fund flow and expected profits must be ascertained which will serve as a basis for comparison. Risk versus Return: Investment decisions always are risky as the gestation period of invested funds is very long and not to return immediately. Further, the firm has to calculate the time period in which its initial investment can be recovered and the feasibility of the rate of return on its investment. Fund Management The finance manager is engaged in activities like, mobilization of funds, deployment of funds, and control over the use of funds and also he is to evaluate the risk return trade-off. Profit maximization is the fundamental objective of any organization and the finance manager plays a key role in restructuring the financial philosophy of a firm to take it to greater...

Every business organisation’s aim is to make profit and more profit. Does it end there? What should be the real motive behind running an organization? Profit maximization alone does not help the organization to firmly plant its feet in the business environment, as the success of an organization in the long run is decided by many critical factors like, market share, value of the company shares, market stand, image etc. So, shall we say, let wealth maximization be the goal of any organization, which focuses on increasing the “earnings per share” of the share holders. What is Profit Maximization? Profit maximization does not take into consideration, the interest of share holders or stake holders, who ought to be the ultimate beneficiaries. Concentrating on short term profits confines a firm and limits its scope and growth whereas; value creation is something that the management should aim for, as it helps to increase the “net worth” of a company. Mere price versus output calculations make firms to operate in a profitable manner, but it should never be the only objective of a firm, as it has the moral and social responsibility to patronize its shareholders by increasing the net worth of the company. Underlying Logic While maximizing profit, a firm either produces maximum output for a given amount of input, or uses minimum input for producing a given output. Thus the underlying logic for profit maximization is efficiency. Under perfect competitive market conditions, profit serves as a perfect measure for the performance of a firm. If profit is the motive of a firm, it fails to consider the time value of money which is an important criterion that decides the success of a firm, and also it values benefits received today and after a period as the same. Moreover the uncertainty factor is there to be considered too. Firms always prefer to have smaller but surer profits rather than larger benefits but less certain. Impact of Taxes When we talk about profits, the next indispensable factor will be the taxes that demand a portion of your profit. Maximizing profits after the payment of taxes facilitates the firm to increase the net profit ratio to serve the best interests of the owners. But, this also fails to maximize the economic welfare of the owners, as it does not take into account, the timing and uncertainty of the benefits. Wealth maximization is the ideal alternative that is consistent with the survival goal and also with the personal objectives of managers such as recognition, power, status and personal wealth. The Right Balance between Risk and Return Mangers while deciding on investment options, seek to achieve a right balance between risk and return. If the firm borrows heavily to finance its operations, care should be taken to ensure that, the rate of return on investment should be sufficient enough to support the payment of interests on borrowings and also to repay the principal. If the firm is not able to “service the debt” there is a danger of the firm becoming bankrupt or insolvent. The firm’s investment and financing decisions are unavoidable and continuous. In order to make rational decisions, the firm must have a goal, which is nothing but the “shareholder’s wealth maximization” which is theoretically logical and operationally...