Objectives of Financial Management

 Objectives of Financial Management

It can be explained from two points of view- Macro level & Micro Level Macro-level theory says the whole society is benefited. On the contrary, according to micro-level theory, the financial objective is determined as per the individual view point of a company, firm or enterprise. There are two mutually opposite thought regarding objective of financial management at Micro -level.

A. Profit Maximization (P.M.O.) objectives

B. Wealth Maximization (W.M.O) objectives

1. PROFIT MAXIMIZATION OBJECTIVES

The objective of financial management of an enterprise is to maximize the profit. Financial Manager should select that alternative which may maximize the profit. In other words, all such actions which increase the profit should be undertaken and those which reduce the profit should be avoided. For maximizing the profit either production is to be maximized from limited resources or cost should be minimized for a particular level of production volume.

JUSTIFITION OF PMO

1. Rationality

2. Maximization of Social benefits

3. Efficient Allocation and uses of resources

4. Measurement Of success of decisions

5. Source of incentives.

LIMITATION OF PMO Profit maximization objective (PMO)

1. Ambiguity/ Loose Expression of the Term profit

2. Profit Maximization objective ignores timings of benefit

3. Fails to recognise the quality of benefits.

2.WEALTH MAXIMISATION OBJECTIVES

            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 an universally accepted concept in the field of business.

Pros/Justification of Wealth Maximisation

1.      Helps businesses focus on long-term sustainability.

2.      Focuses more on cash flow rather than profits. Now, cash flows are more definite, enabling companies to avoid the ambiguity that usually comes with accounting profits.

3.      Takes into account the time value of money. Thus, future cash flows are discounted at an appropriate rate in order to appropriately represent their current value.

4.      Considers risk and uncertainty factors while computing the discount rate, leading to more accurate results.  

The cons of wealth maximisation

a.       Largely depends on a business’s profits.

b.      Wealth-maximising tactics are mostly prospective; they lack proper description and clarity.

c.       It can make other business goals suffer.

 

Charecteristics	Profit Maximisation	Wealth Maximisation
Definition	Focuses on maximizing short-term profits for the business.	Aims to maximize the overall value of shareholders’ wealth.
Time Horizon	Short-term approach.	Long-term approach.
Objective	Increase net earnings and revenue.	Enhance the market value of shares and business growth.
Focus	Operational efficiency and cost-cutting.	Investment, financial planning, and risk management.
Risk Consideration	Ignores risks and uncertainties.	Considers risks and rewards while making decisions.
Decision-making	Decisions based on immediate profit impact.	Decisions based on sustainable growth and future value.
Measurement	Measured in terms of net profit or earnings per share (EPS).	Measured in terms of stock price and shareholders’ returns.
Stakeholder Impact	Prioritizes business owners or shareholders.	Considers shareholders, employees, and society at large.
Example	A company cutting R&D expenses to boost short-term profits.	A company investing in innovation for long-term growth.