Goals of firm are those purposes for which the finance functions are carried out. They are the objectives that guide a firm’s financial decision-making processes.
There are mainly two financial goals commonly pursued by firms are:
- Profit Maximization Goal
- Value Maximization Goal
1.) Profit Maximization Goal:
Profit maximization refers to the process of increasing a company’s earnings as much as possible over a specific period. It is the traditional and most basic financial goal of a business.
- According to this goal, the actions that increase profits should be undertaken and those that decreases profits should be avoided.
This goal has been criticized on the following grounds:
- Ambiguity
- Ignores time value of the benefits
- Ignores the quality of benefits
- Unsuitable in modern business environment
- Improved version of Profit Maximization
2.) Value Maximization Goal:
Value maximization, also known as wealth maximization or shareholder value maximization, is the process of increasing the overall value of the firm for its owners or shareholders over the long term.
The arguments for shareholder wealth maximization goal are:
- Value maximization goal is clear
- It considers the timing of cash flows
- It considers quality of benefits
- It reduces the conflict of interest among the stakeholders of a firm
