Goals or Objectives of Financial Management
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| goals or objective of financial management |
Finance is the life blood of modern business. It is as important for industry and commerce as oil to lubricate wheels, marrow for bones and blood for nerves.
In the present time, finance is needed to start, run and develop smoothly. In the absence of finance, the best plans remain only on paper and even if a plan is implemented due to lack of adequate finance, many difficulties arise in its operation and control. Inadequacy of finance is not the reason for business failure, but it is the mismanagement of finance that is responsible for it. An organization can survive and grow only when it makes the best use of its funds. So it is right to say that without adequate finance no business can survive and without effective financial management no business can prosper and develop. In other words, the success of a business depends upon adequate supply of finance and effective management of finance.
Objectives are expressed as goals, aims, pruposes or targets. They provide standards or parameters to evaluate the performance or success of an organization. The main objective of a business organization is survival and growth. To survive in business and move towards prosperity. A business entity must generate sufficient profit for the economic interests of the owners. The financial objective of the firm is therefore accepted to be the maximization of the economic interests of the owners, but there is disagreement as to how the economic interests of the owners can be maximized. There are two criteria for this - (i) Profit Maximization and (ii) Wealth Maximization have been prescribed. These parameters are called the objectives of financial management, which are being discussed below.
Profit Maximization
The basic objective of every business enterprise is considered to be the interest of its owners, which can be fulfilled by earning maximum profit. Therefore, according to this criterion, the investment, financing and dividend decisions of the enterprise should be oriented towards maximizing profits, that is, those assets, projects and decisions should be selected which are more profitable and those which are not profitable should be rejected. This objective of financial management has been justified on the basis of the following arguments:
(1) Prudent: The purpose of carrying out an economic activity judiciously is to maximize utility. This utility can be measured in terms of profit. Hence profit maximization can be justified on the basis of prudence.
(2) Measurement of economic efficiency: The profit earned in any business enterprise is considered to be the result of its production efficiency, sales and managerial efficiency. Therefore, the performance of a business enterprise can be evaluated on the basis of profit because profit can be increased only by maximizing output or minimizing costs.
(3) Major Motivational Source: Profit paves the way for making an individual or group of persons more efficient than each other through hard work and stiff competition. If the attraction of profit is removed, then there will be no place for mutual competition and competition. In such a situation the pace of development and progress will also slow down.
(4) Maximum Social Welfare: Only if there is more profit, an enterprise can do maximum welfare of the society by spending on various social works like education, medicine, labor welfare etc.
(5) Basis of Decision Making All decisions in business are taken keeping in mind the objective of earning profit. This is the basic foundation of the success of the decisions.
On the basis of the above arguments, although the purpose of profit mobilization of business is justified, it has been criticized for the last few years. First, profit maximizing organizations exploit workers and consumers. Hence it is immoral and promotes corrupt practices. In addition, it leads to social inequalities. and violates human values which are essential for an ideal social system. Second, now many scholars are of the opinion that the objective of maximizing profit can be achieved only in the condition of perfect competition. In the conditions of imperfect competition, the justification for maximization of profit has been lost, whereas in the modern era, imperfect competition is seen in almost all the markets of the world. Third, profit maximization was considered the main objective of business in the early 19th century. The characteristics of the business structure at that time were self-financing, private property and solitary organisations. But the characteristics of modern business are limited liability and separation between management and ownership. Now the management of business is not done by business owners as before, but by professional managers who can be successful in keeping the business in a profitable position only by keeping proper balance in many conflicting interests (customers, employees, government and society). Therefore, in this new business environment, the purpose of profit maximization seems unrealistic, difficult, unfair and unethical. Not only this, but profit maximization has been rejected as the criterion of maximum economic welfare of business owners on the basis of following shortcomings:
(1) Ambiguous: One of the difficulties of profit maximization criteria for financial decision making is the vague concept of profit. Should the firm maximize short run profit or long run profit? Profit can take many forms such as gross profit, profit before interest and tax (PBIT), profit after tax, net profit etc. Which of these benefits should be maximized?
(2) Ignoring the Time Value of Money: The object of profit bridging does not differentiate between the amounts of profit earned by different time periods. In this, equal importance is given to the income received in different years, which is not true in principle. The present value of a rupee received today will not be the same as a rupee received after a year or two, but will certainly be higher.
(3) Aversion to risk: The degree of certainty or uncertainty in the income to be received in future years from an action may be more or less degree, which will be considered as a sign of more or less risk.For example, the sum of the potential earnings of two firms may be the same, but it will be more risky if the earnings of one firm are increasing and decreasing more than the other.
(4) Disregarding the social responsibility of business: The purpose of profit maximization does not consider the social responsibility of the business. In this, the interests of workers, consumers, government and general public are disregarded. The mere purpose of profit maximization can mislead the managers. Due to this, the existence of the institution may be in danger due to neglect of research, executive development and other incomplete investments by them.
On the basis of the above discussion, it can be said that the purpose of profit mitigation of financial management has become unfair and unsuitable in today's changed business conditions. That is why it is now considered an archaic principle as the basic purpose of business. According to Marxist ideology also the idea of maximum profit is considered a symbol of exploitation. There can be a difference of opinion about this statement, but it is true that the principle of profit maximization in perfect competition will certainly lead to centralization of economic power and monopolistic tendencies. This is the reason that now the main objective of financial management is considered to be wealth maximization rather than profit maximisation.