Discuss the objectives of a firm

A. Profit maximization
A company is an entity which invests its resources so as to gain maximum profit –this is a
traditional objective of business or cardinal objective. The business must make profits;
i. To give a return to its owners(shareholders)
The return must be satisfactory i.e. higher than the bank rate on savings account.
The owners may pull out of the company if it is making losses.
ii. It must give a reasonable reward to employees –good salaries and benefits.
The company must make profits some of which should contribute to social causes. Nevertheless
this objective cannot be fully achieved under perfect competition as a number of firms will
compete for a limited number of customers; also maximization of profits must not be done at
the expense of customer welfare i.e. the firm should not achieve this objective by exploiting its
customers as it owes them a duty of care.

B. Wealth maximization/maximization of the net worthiness of a business.
This is achieved through retention of earnings and subsequent reinvestment of these earnings
in the business or other viable ventures .this will boost the value of the company’s share as
shareholders or owners will receive better returns from such ventures. In this case the net worth
should be taken to be the total assets less its liabilities.

C. Social responsibility
i) Maximization of the welfare of its employees
Happy (contented) body of employees will boost the company’s production thus sales and
profits. The company must provide its employees with:-
- Reasonable salaries commensurate with the employees’ qualification, competence,
experience and nature of the job.
- Transport facilities for those people performing sensitive jobs i.e. jobs which can hold
others
- E.g. cashiers, accountants, storekeepers, etc.
- Medical facilities for employees and their families. (To the employee such facilities will
- facilitate a healthy employee who can work better and avoid absences). To their families
this
- is an incentive for the employees.
- Assurance of terminal benefits e.g. pension schemes or other retirement benefits- to
ensure
- steady employees and boost their morale towards the company.
- Recreation facilities e.g. playgrounds, clubs- lower grade employees enjoy mixing with
- management which facilitates unity and harmony in the company and facilitates
attainment
- of the company’s goals.
ii) Interest of customers
A business must be mindful of its customers and must seek to retain them and for this
reason a business should:-
- Provide quality products
- Fair prices for the goods purchased i.e. customers should get a good value for their
money.
- Have an honest dealing with customers i.e. to avoid bouncing them/il l treatments of
customers should be avoided as these contribute to the company’s profitability.
iii) Welfare of the society
A business owes a social responsibility to the society in such forms as:-
- Maintaining sound industrial relations with the society around it
- Avoiding harmful production processes e.g. avoiding pollution of environment.
- The company should contribute to the social cause e.g. in form of:- harambee
donations ,building public clinics, recreational centers ,schools e.t.c.
- The company must identify itself with the society in as much as it must
understand the problems of the society around it e.g. be aware of the society’s
development needs and contribute to its attainment
iv) Fair dealing with suppliers of goods and finance
The company must:-
- Meet its obligations as and when they fall due.
- Avoid dishonor of any obligation and also double dealings in procurement of
goods.
- The creditors also need assurance of the company’s ability not only to service the
current obligations but also to be able to raise more internal equity to back their
finances.
v) Duty to the government
The company must:-
- Pay corporation taxes as and when they fall due.
- Operate within the government development plans e.g. banks and financial
institutions which should operate within boundaries required by the
central bank so as to facilitate development.
- Operate within legal system i.e. adhere to industrial requirements and
ensure safety standards to its employees.

---

marto answered the question on March 4, 2019 at 09:58