abhishreshthaa
Abhijeet S
Objectives of Financial Management
Financial objectives of a firm must be set within the parameters of corporate purpose and mission. Corporate purpose of a firm provides clear indication about what the company is and desired to be.
Thus corporate mission determinates the scope of business, establishing the concentration of company’s effort in terms of customers, products and business areas.
The main objective of the business is to maximize the owner’s economic welfare. This objective can be achieved by:
1. profit maximization
2. wealth maximization
1. Profit Maximization
Profit earning is the main aim of every economic activity. No business can survive without earning profits. Profitability objective may be stated in terms of return on investment or profit to sales ratio.
According to this objectives, all such actions has increased income and cut down cost should be undertaken and those that are likely to have an adverse impact on the profitability of the enterprise should be avoided. However, profit maximization objective suffers, from several drawbacks rendering it on inefficient decision criteria.
2, Wealth Maximization
It is also known as value maximization or net present worth maximization. The value of an asset should be viewed in terms of benefit it can produce. It is based on the concept of cash flow generated by decisions.
If the flow is greater than the total outflow it will be a good conductor and decision and other alternatives may be rejected because it maximizes the wealth of the owner.
Financial objectives of a firm must be set within the parameters of corporate purpose and mission. Corporate purpose of a firm provides clear indication about what the company is and desired to be.
Thus corporate mission determinates the scope of business, establishing the concentration of company’s effort in terms of customers, products and business areas.
The main objective of the business is to maximize the owner’s economic welfare. This objective can be achieved by:
1. profit maximization
2. wealth maximization
1. Profit Maximization
Profit earning is the main aim of every economic activity. No business can survive without earning profits. Profitability objective may be stated in terms of return on investment or profit to sales ratio.
According to this objectives, all such actions has increased income and cut down cost should be undertaken and those that are likely to have an adverse impact on the profitability of the enterprise should be avoided. However, profit maximization objective suffers, from several drawbacks rendering it on inefficient decision criteria.
2, Wealth Maximization
It is also known as value maximization or net present worth maximization. The value of an asset should be viewed in terms of benefit it can produce. It is based on the concept of cash flow generated by decisions.
If the flow is greater than the total outflow it will be a good conductor and decision and other alternatives may be rejected because it maximizes the wealth of the owner.