Growth Maximization as a Financial Management Objective

Growth maximization as an objective of financial management resolves 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 financial management goals 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 organization’s objectives.

Managers are interested in achieving their personal goals such as hefty and ever-growing salaries, status in 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.

Growth Maximization as a Financial Management Objective

On the other hand, the investors are keen to maximize their wealth by maximizing profits, market share, sales, capital, public esteem, etc. Since 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 that 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 the investors’ wealth. Similarly, for the managers, it will be able to provide better job security and good and growing salaries at the pace of an organization’s growth. At the same time, the credit of taking the organization to such levels will bring them status and prestige in the market and society.

Professor Penrose and Marris define 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 the 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.

Growth Maximization as Financial Management Objective

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 a higher growth rate for the firm motivates the managers and owners.

Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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