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Mohammad Ali
Mohammad Ali, Accounts & Financial Advisor
Category: Finance
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Experience:  Qualified Cost & Management Accountant, with 2 years experience in Financial & Audit Services
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When asked what should be the objective of a firms managers,

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When asked what should be the objective of a firm's managers, many people reply, “to maximize profits.” If you agree with that, so state and justify your opinion. If you do not agree, so state and explain why you think maximizing profits is incorrect. Then describe what you think the objective of a firm's managers should be and justify your opinion.

This, of course, depends on the type of a firm. If a firm is a profit-seeking organisation, then its primary objective must be wealth maximization, a phenomenon by which the overall wealth of the shareholder is increased. Profit maximization is part of wealth maximization. It is necessary for the firm because:

  • Profits are necessary for the firm's survival
  • They are a means to increase the firm's capital
  • They will trigger cash flows that will be used to pay business expenses
  • We can set aside a portion of profits for future expansion purposes.
  • Profits would be distributed as dividends amongst shareholders to keep them satisfied.

A situation where it may be incorrect is, if the business is a not-for-profit organisation, then its managers must not focus primarily on profit maximisation, but their primary objective must be the care and goodwill of the people they wish to serve. Take, for example, a charity hospital, in a remote, low-income area. Its objective should be to provide quality health care at very nominal costs, to those who can't afford it. If it starts to charge premium fee for the services that it provides,no one would be able to affordit and its primary objective of serving the people will be simply killed in the process. Therefore, its managers must keep the noble objective of the betterment of the people in the forefront and the rest of the objectives such as profit maximization, market share, growth etc as secondary objectives.

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