Financial management means maximization of economic welfare of its shareholders. Maximization of economic welfare means maximization of wealth of its shareholders. Shareholder’s wealth maximization is reflected in the market value of the firm’s shares. Experts believe that, the goal of financial management is attained when it maximizes the market value of shares. There are two versions of the goals of financial management of the firm- Profit Maximization and Wealth Maximization. Profit maximization
Profit maximization is based on the cardinal rule of efficiency. Its goal is to maximize the returns with the best output and price levels. A firm’s performance is evaluated in terms of profitability. Profit maximization is the traditional and narrow approach, which aims at maximizing the profit of the concern. Allocation of resources and investor’s perception of the company’s performance can be traced to the goal of profit maximization. Wealth maximization
The term wealth means shareholder’s wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is an universally accepted concept in the field of business. Wealth maximization is possible only when the company pursues policies that would increase the market value of shares of the company. It has been accepted by the finance managers as it overcomes the limitations of profit maximization.
The following arguments are in support of the superiority of wealth maximization over profit maximization: * Wealth maximization is based on the concept of cash flows. Cash flows are a reality and not based on any subjective interpretation. On the other hand, profit maximization is based on any subjective interpretation. On the other hand, profit maximization is based on accounting profit and it also contains many subjective elements. * Wealth maximization considers time value of money. Time value of money translates cash flow occurring at different periods into a comparable value at zero period. In this process, the quality of cash flow is considered critical in all decisions as it incorporates the risk associated with the cash flow stream. It finally crystallizes into the rate of return that will motivate investors to part with their hard earned savings. Maximizing the wealth of the shareholders means net present value of the decisions implemented.
Q2. Explain the factors affecting Financial Plan.
Ans. To help your organization succeed, you should develop a plan that needs to be followed. This applies to starting the company, developing new product, creating a new department or any undertaking that affects the company’s future. There are several factors that affect planning in an organization. To create an efficient plan, you need to understand the factors involved in the planning process. Organizational planning is affected by many factors: Priorities - In most companies, the priority is generating revenue, and this priority can sometimes interfere with the planning process of any project. When you start the planning process for any project, you need to assign each of the issues facing the company a priority rating. That priority rating will determine what issues will sidetrack you from the planning of your project, and which issues can wait until the process is complete. Company Resources - Having an idea and developing a plan for your company can help your company to grow and succeed, but if the company does not have the resources to make the plan come together, it can stall progress. One of the first steps to any planning process should be an evaluation of the resources necessary to complete the project, compared to the resources the company has available. Some of the resources to consider are finances, personnel,...