QS Study

We know that the goals of financial management are profit maximization and wealth maximization. These are the important objectives of business firms. Now the question arises of the choices,

which should be the goal of decision making be profit maximization or which strengthen the case for wealth maximization as the goal of the business enterprise.

Argument:

  1. Profits cannot be ascertained well in advance to express the profitability of return as future is uncertain. It is not at possible to maximize what cannot be known.
  2. The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt future to maximize. It is argued that firm’s goal cannot maximize profits but attain a certain level of profit holding certain shares of the market or the certain level of sales.
  3. There must be a balance between the expected return and risk. The possibility of higher expected yields is associated with greater risk to recognize such a balance and wealth maximization is brought in to the analysis. In such cases, higher capitalization rate involves. Such combination of expected returns with risk variations and related capitalization rate cannot be considered in the concept of profit maximization.
  4. The goal of profit maximization is considered being a narrow outlook. Evidently, when profit maximization becomes the basis of the financial decision of the concern, it ignores the interest of the community on one hand and that of the Govt., workers and other concerned persons in the enterprise on the other hand.
  5. Keeping the above objection in view, most of the thinkers on the subject have come to the conclusion that the aim of an enterprise should be wealth maximization, not the profit maximization.

Prof. Solomon of Stanford University has handled the issue very logically. He argues that it is useful to make a distinction between profit and profitability maximization of profit with a view to maximizing the wealth of shares holders is clearly an unreal motive. On the other hand, profitability maximization with a view to using resources to yield economic value higher than the joint values of inputs required is a useful goal.

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