GOALS OF A FIRM / THE OBJECTIVES/ GOALS OF A BUSINESS

THE OBJECTIVES/GOALS OF A BUSINESS
1. Profit maximization – This is a traditional and a cardinal objective of a business. This is so for the following reasons:

  • To earn acceptable returns to its owners. (i.e. Must not be less than bank rates + inflation + risk)
  • So as to survive (through plough backs)
  • To meet its day to day obligations.

2. To maximize the net worth i.e. the difference between total assets and total liabilities. This is important because:

  • It influences company’s share prices.
  • It facilitates growth (plough backs).
  • It boosts the company’s credit rating.
  • This is what owners claim from the company.

3. To maximize welfare of employees – Happy employees will contribute to the profitability. This includes:

  • Reasonable salaries
  • Transport facilities
  • Medical facilities for the employee and his family
  • Recreation facilities (sporting facilities).

4. Interests of customers – the company has to provide quality goods at fair prices and have honest dealings with customers.
5. Welfare of the society – the company has to maintain sound industrial relations with the society:

  • Avoid pollution
  • Contribution to social causes e.g. Harambee contributions, building clinics etc.

6. Fair dealing with suppliers. A company must:

  • Meet its obligations on time
  • Avoid dishonor of obligations.

7. Duty to the government: A company should:

  • Pay taxes promptly
  • Go government plans
  • Operate within legal framework.

The Main objectives of a business entity are explained in detail below
Any business firm would have certain objectives, which it aims at achieving. The major goals of a firm are:

  • Profit maximisation
  • Shareholders’ wealth maximisation
  • Social responsibility
  • Business Ethics

a) Profit maximization
Traditionally, this was considered to be the major goal of the firm. Profit maximization refers to achieving the highest possible profits during the year. This could be achieved either increasing sales revenue or reducing expenses. Note that:
Profit = Revenue – Expenses
The sales revenue can be increased either increasing the sales volume or the selling price. It should be noted however, that maximizing sales revenue may at the same time result to increasing the firm’s expenses. The pricing mechanism will however, help the firm to determine which goods and services to provide so as to maximize profits of the firm.
The profit maximization goal has been criticized because of the following:

  • It ignores time value of money
  • It ignores risk and uncertainties
  • It is vague
  • It ignores other participants in the firm rather than shareholders

b) Shareholders’ wealth maximisation
Shareholders’ wealth maximisation refers to maximisation of the net present value of every decision made in the firm. Net present value is equal to the difference between the present value of benefits received from a decision and the present value of the cost of the decision.
A financial action with a positive net present value will maximize the wealth of the shareholders, while a decision with a negative net present value will reduce the wealth of the shareholders.
Under this goal, a firm will only take those decisions that result in a positive net present value.
Shareholder wealth maximisation helps to solve the problems with profit maximisation. This is because, the goal:

  • Considers time value of money discounting the expected future cash flows to the present.
  • It recognizes risk using a discount rate (which is a measure of risk) to discount the cash flows to the present.

c) Social responsibility
The firm must decide whether to operate strictly in their shareholders’ best interests or be responsible to their employers, their customers, and the community in which they operate. The firm may be involved in activities which do not directly benefit the shareholders, but which will improve the business environment. This has a long term advantage to the firm and therefore in the long term the shareholders wealth may be maximized.

d) Business Ethics
Related to the issue of social responsibility is the question of business ethics. Ethics are defined as the “standards of conduct or moral behaviour”. It can be though of as the company’s attitude toward its stakeholders, that is, its employees, customers, suppliers, community in general creditors, and shareholders. High standards of ethical behaviour demand that a firm treat each of these constituents in a fair and honest manner. A firm’s commitment to business ethics can be measured the tendency of the firm and its employees to adhere to laws and regulations relating to:

  • Product safety and quality
  • Fair employment practices
  • Fair marketing and selling practices
  • The use of confidential information for personal gain
  • Illegal political involvement
  • Bribery or illegal payments to obtain business.

GOALS OF A FIRM / THE OBJECTIVES/ GOALS OF A BUSINESS

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