Objectives of financial management
The objective of financial management may be broadly divided
into two parts such as:
1.
Profit maximization
2.
Wealth maximization
Profit maximization –
The main aim of any kind of economic activity is to earn profit. A business concern also
functions mainly to earn profit. Profit is the measuring
technique to understand the business efficiency of the concern. Profit
maximization is also the traditional and narrow approach, which aims to maximize
the profit of the concern.
Favorable arguments for profit maximization
The following important points are in support of the profit
maximization objectives of the business concern.
1.
Main aim is earning profit.
2.
Profit is the parameter of the business concern.
3.
Profit reduces the risk of the business concern.
4.
Profit is the main source of finance.
5.
Profitability meets social needs also.
Unprofitable arguments for the profit maximization
The following important points are against the objectives of
profit maximization.
1.
Profit maximization leads to exploiting workers
and consumers.
2.
Profit maximization creates immoral practices
such as corrupt practices, unfair trade practices, etc.
3.
Profit maximization objectives lead to
inequalities among the sake holders such as customers, suppliers, public
shareholders, etc.
Drawbacks of profit maximization
The profit maximization objective consists of certain drawbacks also.
1.
It is vague: In the objective, profit is
not defined correctly. It creates some unnecessary opinions regarding earning a habit of the business concern.
2.
It ignores the time value of money: Profit
maximization does not consider the time value of money or the net present value
of cash inflow. It leads contain differences between the actual cash inflow and
net present cash flow during a particular period.
3.
It ignores risks: Profit maximization
does not consider risk the business concern. The risk may be internal or external
which will affect the overall operation of the business concern.
Wealth maximization -
Wealth
maximization is one of the modern approaches, which involves the latest innovations
and improvements in the field of business concern. The term wealth means
shareholder wealth or wealth of the persons 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
1.
Wealth maximization is superior to profit
maximization because the main aim of the business concern under this concept is
to improve the value or wealth of the shareholders.
2.
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 extra
value to the business concern.
3.
Wealth maximization considers both the tie and risk
of the business concern.
4.
Wealth maximization provides efficient
allocation of resources.
5.
It ensures the economic interest of the society.
Unfavorable arguments for wealth maximization
1.
Wealth maximization leads to prescriptive ideas of business concern but it may not be suitable for present-day business
activities.
2.
Wealth maximization is nothing, it is also
profit maximization, it is the indirect name of profit maximization.
3.
Wealth maximization creates ownership-management
controversy.
4.
Management alone enjoys certain benefits.
5.
The ultimate aim of the wealth maximization
objectives is to maximize profit.
6.
Wealth maximization can be activated only with
the help of the profitable position of the business concern.