Business is not established as a vacuum. It is estabished to meet certain objectives. If you have read my articles from the beginning you will notice that business is established to satisfy certain social challenges.
To meet up with this challenges, a business need to understand the following seven objectives of a business.
1. Profit maximization
2. Profitability maximization
4. Long-term stability
5. Shareholders’ wealth maximization
6. Corporate wealth maximization and
The primary reason of establishing in a business is earning profit. If a business fail to make profit the business has no use to the community.
The profit maximization objective is the accounting profit of a business.
Financial managers therefore ensures they meet up with this objectives. Since the owners of the business are very much interested in the profit of the business.
Profitability maximization measures profit in terms of the assets of the business.
It measurements include return on capital employed ROCE, return on investment ROI, earnings per share EPS and so on.
A problem with this objective is the determination of profit. The financial manager has to determine the what profit to use. Is it profit before tax or profit after tax? Is it profit after shareholder dividend and interest.
This is the ability of a business to meet it financial obligations as they fall due.
A business that can not meet its’ financial obligation even when there is no economic downturn may end up in a bad state and no investor will want to invest in such a business.
Therefore, financial managers strive to meet this obligations.
No business want to remain contant. All business owners want their businesses to grow at the same time want to remain stable for a long periods of time.
To meet long-term stability goal, the financial manager need to trade-off. That is to chose between aggresive growth or long term stability.
SHAREHOLDER WEALTH MAXIMIZATION
This measures return on ordinary shareholders investment. The measurement is based on dividend and capital gains.
Wealth creation also means maximizing the value of the share price of an enity.
Wealth mazimization also account for short term and long term benefits. Also, it considers risk and return of the value of shares.
CORPORATE WEALTH MAXIMIZATION
This objective is an alternative to shareholder wealth maximization. It includes other stakeholders such as management, suppliers, customers, employees, debenture holders and government.
This objective is considered so that every stakeholder will benefit from the business in the long run.
This is the rise in the value of profit and assets of a business.
This is a good objective because no present and potential investor want to invest their fund on a business that is stagnant.
To acheive this, businesses keep part of profit for growth and expansion as reserves. Also, from time to time, businesses raise fund through the capital market.