Frequently, maximisation of profit is regarded as the major goal of the business. Hiwever, this is not a well-defined objective because:
- 'maximising profit' leaves open the question of "which year's profit". Shareholders might not want a manager to increase next year's profit if this will be at the expense of profit in later years.
- Difference accountants may calculate profits in different ways. So you may find that a decision that improves profits using one set of accounting rules may reduce them using another. Also there may be deliberate 'window dressing' ro show a better situation than really exists.
Investors are, in fact, not just interested in the annual profit and dividend, but also – and often more – in the market price of their shares. If, for any reason, the price falls, and the shareholder wants to sell his sharesm he will suffer a loss. If the price increases, the shareholder will make a capital gain when he sells his shares.
We can therefore say that the financial objective of a business enterprise is to maximise shareholders' wealth, consistent with the risk involved. Maximising profit on capital invested, while keeping risk at an acceptable level, will maximise shareholders' wealth, which will then be reflected in the market price of the shares.
I am Peter, a blogger, SEO and social media person who has an interest in E-commerce, ERP and CMS systems. You can contact me by e-mail: kaizenlog@gmail.com
