Profit Maximization and Financial Management
Every business operating in the competitive market should always aim at maximizing the profits for the enterprise. Every idea or vision the company will have are supposed to be geared to achieving optimum benefits. This goes without saying that any company that makes losses and run to liquidity and become bankrupt. This provides the management of any organization to ensure that every financial decision made should make maximization of profits as its primary approach. Maximization of profits includes every process that increases the EPS (Earning per share). The arrangements, including in investments and also finance, should all follow the direction of creating large profits.
Every decision that an organization will make, including Raising the capital of the firm, acquiring new assets are carefully considered to cushion the firm from unnecessary liabilities.
Profits are essential to a firm for the following reason;
- Profits will take care of the financial, social and economic welfare of a firm. When there are profits, this is a clear indication that there is the proper utilization of the resources. Profits take care for the payment of capital, labour, land assets and debts
- Profits are also crucial for the business survives in the economy.
- Profits are a measure of the performance of any business. Without profits the company cannot survive and be viable
Agency Problems
- Agency problems between managers and business shareholders: In any firm or business organizations, the real owners are the shareholders, the shareholders have a percentage of their investments put in the company. Shareholders are engaged in other activities hence cannot foresee the day to day running of a company. They appoint the managers through the board of directors. The managers, when put in charge of a company they are concerned with their power and personal benefits. This may sometimes lead to loss of profits for the firm there could also be lack of wealth creation leading to damages for the shareholders.
- Principal-Agent Problem; The primary agent problem occurs when the shareholders main mission and am is to create scenarios in which the company makes decisions that are mainly geared towards maximization of profits. This could not be the case with the managers, who sometimes are not sharing the same mind with the shareholders. This problem may provide opportunities for workers who are very lazy to be employed in an organization. The standards that are set by the shareholders are not met, leading to the abysmal performance of the company.
Agency problems and Small Enterprises
Most agency problems occur with big organizations where some sub-contractors are supervising the daily running of businesses, Mostly the shareholders are located in different places hence they are not capable of running their investments .That’s why managers are highbred to pursue their interest. Small business enterprises that are run by their owners may never face the hazard of agency problems since they do not require a lot of investments. Though even small business may be run on behalf of the owner. This may cause conflict with the owner due to application of different ideas.
Solving Agency Problems
Principal-agent problems can be solved by catering to the welfare of the employees. Increase in incentives can lead the employers to work towards the desired goal. Conflicts between managers and shareholders can be solved by creating workshops where the shareholders explain their goals to the employees. Shareholders can make timely supervision of their organizations.