Growth Maximization as a Financial Management Objective

Growth maximization as an objective of financial management resolve the various limitations assumed by the previous two theories. We have observed the evolution of the financial management objective from a traditional approach of profit maximization to an improved concept of wealth maximization. Both the approaches have their pros and cons.

The parties affected by the goals of financial management are broadly the managers who manage the business and the owners/shareholders who invest their money into it. It is well understood that they have their set of personal objectives. They will be satisfied and continue their support only if their personal goals are achieved while acting for the objectives of the organization.

Managers are interested in making their personal goals such as hefty and ever-growing salaries, status in the society, power in the organization, job security, prestige in the market etc. It is very logical from the angle of the managers to run behind their goals to smoothly run their life cycle.

On the other hand, the investors are keen to have their wealth maximized by way of maximizing profits, market share, sales, capital, public esteem etc. Growth Maximization as a Financial Management ObjectiveSince they have invested their hard earned money in the business, they are also logical in asking for the due returns on their invested sum.

In the given situation, growth maximization as a financial management objective for the managers and owners reconciles the situation to a greater extent and creates a win-win situation. Growth is something which will bring along growth in the personal objective of both the parties viz. managers and investors. A growing organization in terms of its sales, market share, profits etc will automatically lead to improved returns or maximization of wealth of the investors. Similarly, for the managers, it will be able to provide better job security, good and growing salaries at the pace of an organization’s growth. At the same time, the credit of taking the organization at such levels will bring them status and prestige in the market as well as society.

Professor Penrose and Marris defines a balanced growth rate to be an objective of financial management. They assume that growth means the growth rate of demand for the product produced/sold by the organization and rate of growth of capital supply to the organization. It is also assumed that both the growth rates should be equal to achieve the maximum balanced growth rate.

These two growth rates are interpreted as two utility functions viz.
Manager’s Utility Function (Um) = f {salaries, status, power, job security, prestige etc)
Owner’s Utility Function (Uo) = f {sales, capital, profit volumes, market share, etc)

Since the personal interest of both owners and managers are in harmony with each other. The single objective of achieving higher growth rate for the firm motivates the managers as well as owners.

Last updated on : August 21st, 2018

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One Response

  1. Afzaal Rasheed

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