OBJECTIVES OF BUSINESS ORGANIZATIONS

Introduction

The objective of an organization is the end which the organization intends to achieve and which investment and financing decisions encourage it to achieve.

The decisions made are therefore normally made with respect to the objective or goal of the organization

Introduction

If decisions were not matched with objectives, there would be: Absence of relevant information with which

the decision maker will work; and No bases for financial managers’ decisions.

These may result in decisions being taken that may not be congruent with the organization’s objectives

Objectives of Business Organizations There are many objectives which an

organization can pursue. It is generally accepted that there should be one overall objective with all other objectives giving support so that this overall objective can be achieved.

What is, however the objective that should serve as the real objective of the organization.

For a business organization, a financial objective is generally taken as the overall objective.

Financial objectives

Profit maximization Profitability maximization Liquidity Long-term stability Growth Corporate wealth maximization; and Shareholder’s wealth maximization

Profit Maximization

This objective refers to accounting profits and it means that financial managers should attempt to make as much profits as possible

Financial managers tend to pursue this objective because of the fact that the ordinary shareholders are, in law, the owners of the organization. They have ultimate control of the company and take residual profits.

Profit Maximization

Deficiencies of profit maximization: A company, for the purpose of expanding

its operations, may raise additional capital but the additional profits generated may not justify the additional capital obtained. In this case, profits may be rising but earnings per share may be falling.

Profit Maximization

Deficiencies of profit maximization: A company earning short-term profits at

the expense of long-term profitability. For example, management may be tempted to cut down research and development expenditure in a particular year. This may increase the profits of that year but jeopardize future sales and profitability.

Profit Maximization

Deficiencies of profit maximization: Profit maximization, as an objective,

ignores risk. Risk, particularly business risk, is an unavoidable fact of business life as business organizations operate into the future.

Profitability Maximization

It takes into account both profits and the assets utilized in generating such profits. Measures of profitability include Return on Capital Employed (ROCE), or Return on Investment(ROI), Return on Equity (ROE) and Earnings Per Share (EPS) and so on.

Profitability Maximization

This objective also has short-comings: Problem of definitions: that is, which profits

and capital are to be used; The uncertainty that goes with earning of

the profits (risk) is ignored; Time value of money is also ignored; and It fails to provide an operational feasible

measure for ranking alternative courses of action in terms of their economic efficiency.

Liquidity

This is purely a short-term objective which should be pursued only in a period of temporary economic meltdown. During this period, it is the “survival instinct” that is critical. Shareholders are not likely to put their funds in a company whose management lacks the required aggressiveness for long-term profitability and growth.

Long-Term Stability

The company does not want to grow but to maintain its present size over a relatively long period of time.

This is not good enough as it shows lack of aggressiveness on the part of the managers.

Growth

This implies growth in profits and assets. This is a good objective as it shows that short-term profits will not be pursued at the expense of long-term financial stability.

However, this objective is deficient in some way since growth can be achieved by merely raising funds in the capital markets.

Corporate Wealth Maximization

This is an alternative objective to shareholders wealth maximization. The emphasis is on stakeholders.

All interest groups in a business organization as against one interest group (shareholders) are considered. The individual group’s interest are treated at par as against maximizing the shareholder’s interest alone.

Corporate Wealth Maximization

Typical stakeholders, aside from ordinary shareholders, are management, employees, customers, suppliers, bank and loan creditors, local community and government.

The intention of this objective is to maximize long-run earnings and to retain enough to increase the corporate wealth for the benefit of all stakeholders.

Shareholder’s Wealth Maximization

This objective seeks to maximize return to ordinary shareholders, as measured by the sum of dividends and capital appreciation. Wealth maximization also implies maximizing the company or its share price.

The share price is the result of general consensus among market operators regarding the value of companies and mirrors its expectations concerning the current and anticipated future profits of the firm, reflects the time value of money to them and the risk attached to those profit.

Shareholder’s Wealth Maximization Wealth maximization takes into

account both risk and return. Short-term and long-term benefits are also given equal prominence.

Financial managers should assume and follow this objective in their financial decision making. They should balance it with those other stakeholders in the firms.

Non-Financial objectives

The following are some of the operational objectives of a business organization which are essential for the achievement of its overall strategic objective: Market share – control a larger portion of the

market Sales growth – obtain a specified percentage of

growth in sales volume at a pre-determined price level

Market Development – Sell existing products in new markets

Non-Financial objectives

Technological Improvements - Acquire the state-of-the-art technology in manufacturing equipment.

Organization – create a structure that encourages appropriate delegation of authority, adequate motivation and good participation.

Social and ethical responsibility – meet the social expectations of the society and the environment in which it operates.

Social and Ethical Obligations

A company is an integral part of the society and cannot be separated from the environment (internal and external) in which it operates. It, therefore, owes stakeholders both within and outside the company certain social and ethical obligations, among which are: Employees - provide conducive work

environment, job satisfaction and job security. Customers – produce good quality product(s)

at affordable price(s) and devoid any health hazards.

Social and Ethical Obligations

Suppliers - pay as when due and avoid exploitation Local community – protect the environment from

pollution of the air and water through industrial wastage and oil spillages. Give financial aids to charities and support sports development programs. Set up schools and colleges to enhance educational opportunities of the children in the community. Get involved in other community activities.

Government – co-operate with government by paying its tax when due and discourage tax evasion. Obey all laws which affect its operations for example health and safety of its workers. Discourage imports and avoid smuggling.