OBJECTIVES OF BUSINESS
ORGANIZATIONS
Introduction
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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
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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

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
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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
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
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 stateof-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:
Social and Ethical Obligations
 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.
 Suppliers - pay as when due and avoid exploitation
Social and Ethical Obligations
 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.