May 28, 2022

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TWO MAJOR OBJECTIVES OF FINANCIAL MANAGEMENT AND THEIR DRAWBACKS

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TWO MAJOR OBJECTIVES OF FINANCIAL MANAGEMENT AND THEIR DRAWBACKS

According to S.C. Kuchal Financial Management is the procurement of funds and their effective utilization in the business. There are various ways to procure fund. Funds can be raised from the capital market, banks and from individuals.

However, such funds need to be efficiently managed for the firm to earn good result and the meet the needs of the providers of such funds.

This is why it is important for us to discuss the objectives of financial management.

The objectives are:

1. Profit maximization

2. Wealth maximization.

PROFIT MAXIMIZATION

The primary objective of any kind of economic activity is profit-making.

In a capitalist economy a business is established mainly for the purpose of profit.

Profit is a traditional method of measuring the success of a business.

FEATURES OF PROFIT MAXIMIZATION OBJECTIVES

1. It maximizes business operation for profit.

2. Profit maximization objectives help to reduce the risk business risk.

3. Profit is used to measure the efficiency of the business concern.

4.The ultimate aim of the business concern is profit-making, hence, it considers all the possible ways to increase the profitability of the concern.

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5.It helps equity holders to know if their funds is efficiently utilised.

 ADVANTAGES OF PROFIT MAXIMIZATION

The arguments for profit maximization are:

(i) The main aim is profit-making.

(ii) Profit is the biometer of the business operation.

(iii) Profit reduces business risk.

(iv) Profit is the internal source of finance.

(v) Profitability meets the social needs of the community the business is located.

DISADVANTAGES OF PROFIT MAXIMIZATION

The following are arguments against profit maximization:

(i) Profit maximization leads to exploition employees and consumers.

(ii) These objectives lead to inequalities among the stakeholders such as customers, suppliers, shareholders, debenture holders etc.

(iii)Profit maximization causes immoral practices such as: corrupt practice, unfair trade practice, substandadized product, etc.

DRAWBACKS OF PROFIT MAXIMIZATIONS

Profit maximization objective consists of certain drawback also:

(i) It is vague: This objective do not planly define profit. Profit can be before tax or after tax. It creates unnecessary opinion regarding profit habits of the business.

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(ii) It avoids risk: Profit maximization does not consider risk of the business. Risks may be internal or external and it  affects the main operation of the business.

(iii) It does not consider the time value of money: Profit maximization ignores the time value of money or the net present value of the cash inflow. It leads certain differences between the actual cash inflow and net present cash flow during a particular period.

SHAREHOLDER WEALTH MAXIMIZATION

Shareholder wealth maximization is a modern approach. Which involves latest innovations and improvements in the field of the finance.

The term shareholder wealth means the wealth of the persons who provide capital for the business.

Wealth maximization is also known as the value of net present worth of the business.

ADVANTAGES OF SHAREHOLDER WEALTH MAXIMAZATION

(i) Wealth maximization is better than profit maximization because the primary aim of the business. under this concept is to improve the value or wealth of the shareholders.

(ii) Wealth maximization considers the comparison of the value to cost associated with the business. Total value detected from the total cost incurred for the business operation. It provides extract value of the business.

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(iii) Wealth maximization considers both time and risk of the business.

(iv) Wealth maximization provides efficient allocation of resources.

(v) It protects the economic interest of the public.

DISADVANTAGES OF STAKEHOLDER WEATH MAXIMIZATION

(i) Wealth maximization leads to prescriptive idea of the business but it may not be suitable to modern day business activities.

(ii) Wealth maximization is nothing, it is also profit maximization, it is the indirect name of the profit maximization.

(iii) Wealth maximization creates controversy over ownership-management.

(iv) Management alone enjoy certain benefits.

(v) The ultimate aim of the wealth maximization objectives is to maximize the profit which is the same as profit maximization.

(vi) Wealth maximization can be activated only with the help of the profitable position of the business.

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