## Objectives of Financial Management

Effective financial management needs clear objectives, because every decision is judged against them. The two primary objectives discussed in detail are:

1. Profit Maximization

2. Wealth / Value Maximization

### Profit Maximization

Traditionally, profit maximization was treated as the primary goal of a company — every alternative was assessed by whether it maximized profit.

However, profit maximization has important limitations and should not be the sole objective of a business. Common criticisms include:

The term 'profit' is vague/ambiguous — short-term vs long-term, total vs per-share, before or after tax.
It ignores the time value of money — profits earned in different years are treated as equal.
It ignores risk — a strategy may raise profit while greatly increasing the risk to the firm.
It can encourage short-term decisions that harm long-term health.

Because of these flaws, modern financial management favours wealth/value maximization (maximizing shareholder wealth), which accounts for the timing of cash flows, risk, and long-term value — over crude profit maximization.

> Note: This section introduces the objectives; profit maximization's limitations lead directly into the case for wealth maximization as the superior objective.

⚠️ Common exam mistakes

Treating profit maximization as the ideal objective; it ignores timing (time value of money) and risk, which is why wealth maximization is preferred.
Failing to note that the word 'profit' is itself ambiguous (short vs long term, per share vs total, pre vs post tax).
Confusing profit maximization with wealth/value maximization — they are distinct objectives with different implications.

Reference:

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Objectives of Financial Management — Profit Maximization

⚠️ Common exam mistakes