Profit Maximisation Vs Wealth Maximisation
One of the most important objectives of financial management is Profit maximization. The objective of profit maximization measures the performance of a company by looking at its total profit. In this process of profit maximization, the risk performed by the firm is not considered. Though profit maximization is criticized, as it ignores the timing of returns, it ignored the interest of consumers, workers, and society, it ignores the effect of dividend policy on the market value of shares, it does not consider uncertainty or future earnings and it does not differentiate between short-term and long-term profits.
On the other hand, the wealth maximization objective is to consider all the future cash flows, dividends, earnings per share, risk of a decision, etc. The objective of wealth maximization is not possible without ensuring the availability of sufficient funds at a reasonable cost with effective utilization of funds and ensuring the safety of funds by creating reserves, re-investment of profits, etc. This objective also helps in achieving other objectives of financial management.
Role and Objectives of Financial Management
We all know that finance is essential for running a business. Business enterprises require careful financial planning and understanding of the resultant capital structure, risks, and profitability that they may have. All these have an effect on shareholders as well as the employees. They require an understanding of business finance, major financial decision areas, financial risk, and the business’s working capital requirements. The success of a business depends on how well finance is invested in assets and operations and how timely and cheaply the finance is arranged from different sources.
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