Objectives of a firm:

-

Two primary objectives are commonly encountered .One is maximization of profit and another is maximization of wealth.

Profit maximization :

Profit maximization means maximizing the amount of any currency income from fund.Many businessmen believe that as long as they are earning as much as possible,while holding down costs,they are achieving their goals.
It has the benefit of being a simple and straight and straightforward statement of purpose .It is easily understood as a rational goal for a business ,it focuses the firm's effort toward making money.

Limitations of profit maximization:

Profit maximization is widely professed but in fact this concept has several weakness.
1.It is vague  : The problem is the definition of 'profit' .That is profit maximization objective is unclear.Does it mean short or long term profit?Does it refer to profit before or after tax ?total profit or per share?
2.It ignores timing :It does not make a distinction between returns received in different time of periods.It doesn't consider the time value of money.In this case received today and received after a period are the same.
3.It ignores risk: It doesn't consider risk and uncertainty of returns Suppose two firms are earning equal profit.But one is less risky another one is more.We should accept that firm which is less risky.But as per this object it doesn't consider this concept.
The main part of these objectives is to earn money and profit by any means,by taking much risk,by applying deception.But this can't be  a legitimate objective of a firm.

Wealth maximization :

The second frequently encountered objectives of a firm to maximize the wealth value of the firm over the long run.It means maximizing the net present value of a course of action to shareholders.In case of sole tradership and partnership and partnership business."Wealth maximization" means maximizing the "Net worth".

Advantages of wealth maximization :

1.It is not vague:In this case cash flows are considered and this is categorically defined.it is more dependable and well formed than "profit".It is proved that cash flow is more important in case of investment decisions,not profit.
2.Risk consideration : It takes much care of timing and risk of future benefits.

3.Value of share: Maximization of wealth means maximization of the financial benefits of shareholders,maximizing wealth,maximizing the happiness of all parties related to the company.

Comments

Post a Comment

Popular posts from this blog

Advantages of motivation in management

-
Definition of motivation Motivation is the inner state that causes an individual to behave in a way that ensures the accomplishment of some goal. In other words, motivation explains why people act as they do. Motivation may be defined as the process at stimulating some to adopt a desired course of action. In brief sense motivation is the drive to achieve a goal. In details sense to attain organizational goal, motivation is a process of making best use of the organization's employees and it is a system to encourage, inspire and to motive the organizational activities. Borolson and Steiner described that, "motivation is an inner state that energizes. activates, or moves and directs or channels behavior toward goals". M.J. Gannon described that "Motivation basically means an individual needs desires and concepts that cause him or her to act in a particular manned'. Heinz Weihrich and Harrold Koontz describe that "Motivation is a general term applying t...
Read more

BENEFITS OF BANK RECONCILIATION

-
Bank reconciliations are an important accounting procedure, performed by companies of all sizes, to match the cash balance of the bank with the balance found on the company's financial records. Reconciliations can detect and prevent intentional fraud, along with errors by bank tellers, accountants, employees, and management. Although bank reconciliation is typically a month-end procedure, companies with smaller cash resources might perform it daily. Detects fraud Because bank reconciliations match a company's disbursed checks with the cleared checks on the company's bank statement, a careful review based on appropriate controls and procedures helps to reveal fraudulent activities. These could include payments for illegitimate business purposes, payments to unauthorized employees or unauthorized vendors, and amended check amounts and details. Prevents overdraft The lag time between cash outflows to vendors and employees - and payments coming in from clients and customers - c...
Read more

The Importance of Impact Shorts in Snowboarding

-
  The Importance of Impact Shorts in Snowboarding Impact shorts, also known as padded shorts or crash pants, are specifically designed to absorb shocks and reduce the severity of injuries during falls. They are typically worn under snowboarding pants and feature padding in key areas prone to impact. Benefits of Wearing Impact Shorts Protection Against Injuries : They provide cushioning to vulnerable areas, minimizing the risk of bruises, fractures, and other injuries. Facebook +9 snowboardingdays.com +9 snowboardingforum.com +9 Enhanced Confidence : Knowing you're protected allows you to push your limits and try new techniques without excessive fear of injury. Comfort : Modern impact shorts are designed to be lightweight and breathable, ensuring comfort during long sessions on the slopes. Versatility : Suitable for various snowboarding styles, from freestyle to alpine, making them a valuable addition to any snowboarder's gear. Key Features to Consider When Cho...
Read more