There are two competing theories about the goal or the objectives of a modern business. The first theory is on economic perspective and is concerned with maximizing the owners’ wealth or equity (Lussier & Achua, 2013). According to this theory, profit maximization remains the sole objective of the firm and has no interest in the firm’s relationship with other constituents such as the suppliers, employees, customers and the society as a whole. Nevertheless, there is a broader perspective that defines the goal of the firm and is based on the stakeholder theory. Under this theory, the goal of the firm is not only increasing the wealth for the shareholders but also improved the relationship with the firm’s constituents such as creditors, shareholders, suppliers, customers, regulators and the society as a whole. It is essential to note that the community plays a significant role in the success of any firm and hence prudent for the managers and employees to consider both profit maximization and the welfare of other interested parties.  Managers and employees of a firm should not only concentrate on increasing the wealth of the owners but should also consider other important aspects such as risk, cash flows and the timing of returns.

Measuring the goal

Where the utmost purpose of the firm is profit maximization, the Earnings Per Share (EPS) is used as the primary measure of the achievement of the goal. The simplest and the main measure of firm’s profit maximization is the measure of the stockholders wealth which is the stock price (Lussier & Achua, 2013). It is believed that this is a signal that the company’s profits are headed in the right direction. It is, however, imperative to point out that this is not an effective measure of the firm’s success as it fails to address the issue of timing of the returns, cash flows available to stockholders and risks involved.  It is important to point out that a firm can earn a return on funds it receives; the receipt of the funds sooner than later is preferred.

Besides the timing of the firm’s returns, it is also prudent to note that the profits and cash flows are not identical. It is essential to note that profits that firms report are mainly estimates of how it is performing and these estimates are usually influenced by various accounting choices used by the firm.  It is prudent to note that the firm has bills and other overheads that must also be included in the cash flow operations. Another limitation involved in this measure of the goal of the firm is a failure to consider the risk matters involved (Lussier & Achua, 2013). For instance, a firm that earns low but reliable profits could be of much value than a firm whose earnings fluctuate to a great extent. It is, therefore, essential for the managers and employees in organizations to be proactive in how they measure achievement in their respective firms. This explains why profit maximization should not be the primary goal of the firm but should also incorporate other factors and also the wellness of employees, suppliers, creditors and the society.

References

Lussier, R. & Achua, C. (2013). Leadership: Theory, Application, & Skill DevelopmentMason, Ohio: Thomson/SouthWestern.

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