Question

(a) Explain four (4) possible financial management objectives of businesses that make profits. 8 marks (b) Explain the weaknesses or problems of each of the objectives you have explained in (a) above. 8 marks (c) What do you think should be the best objective of profit-making business organisations and why do you think that should be the best objective? 4 marks;

Answer 1

a) four (4) possible financial management objectives of businesses that make profits are as follows:

• Objective 1- To maximize profit: Profit maximization is the first and foremost financial management objective for a business organization. Profit maximization is the ultimate aim of business over the years irrespective of firm size. Profit should be maximized at a steady rate.

• Objective 2- To generate revenue: Enhancement of income is the basic goal of a business. Thus, revenue growth should be highly prioritized by the financial management of business organizations. It comes from emphasizing on sales and marketing activities. Therefore, sales should increase keeping in accordance with marketing strategies.

• Objective 3- To maximize values: Apart from maximizing revenue, and profit, it is to maximize the organizational benefits. Equity share of a company is the primary parameter of corporate value. Thus, it should be appropriately traded in the share market to maximize value.

• Objective 4- To ensure return on capital investment: Return on investment must be on the focus of the financial management of a business organization. It helps to generate profit from the investment and applies to all stocks, bonds, and other investment instruments.

b) Problems of objective one are as follows:

• Low product price can be a significant issue in making a profit. It reduces the possibilities of getting a steady amount as a return.

• High overhead costs enhance the cost of investment. The enhancement of overhead cost reduces profit maximization that directly impacts on business.

• Fierce competition can be a significant barrier to maximizing profitability in the organization.

Problems of the second objective are as follows:

• Inadequate source of revenue is a crucial problem for generating more new revenue.

• Lack of market awareness creates issues in generating new revenue from the target market.

• Inconsistent market activities is a crucial issue in generating revenue.

Problems of third objectives are as follows:

• Repetitive products or services cannot generate any additional market value for an organization.

• Lak of intensity among managers is a crucial issue to value creation.

• Inability to apply value, in reality, is an issue in creating value.

Problems of the fourth objective are mentioned below:

• Confusion on the amount of creating financial gain is a crucial barrier to gaining the return on investment.

• Inaccurate use of return on investment is a significant issue

• Inability to getting a return on time is the most critical factor of return on investment.

c) The best objective for a profit-making business organization is to generate more revenue because it can ensure a higher return through profitability from lower investment. It also helps in creating more resource for the organization.