What should be the basic financial objective of a company?
For those who have little relation to financing, they tend to think that the main financial objective of a business is to maximize profits because we must keep in mind that when commercial objectives are established, they establish a type of frame of reference which helps decision-making and if the manager focuses on decision making exclusively for maximum utility, there is a danger that this will not guarantee the company’s future. Since profit maximization is a short-term criterion.
Can you imagine, then, what kind of decisions an entrepreneur could have that had the sole purpose of maximizing his profits?
Of course, the actions that would lead to this goal would be: Reducing costs and expenses, which could focus on the use of cheap and low-skilled labor, use of dubious quality raw materials, maintenance and quality control, high sales prices, limited provision of after-sales services, little investment in advertising and downsizing, and who knows what else.
It is possible that with this type of strategy, the company will initially generate high profits, but do you think that such a situation can be sustainable in the current competitive conditions in the market?
Well, as you are thinking, it would not be sustainable, since cheap, unqualified labor generates unproductiveness and deteriorates quality, the machine uses quickly and the worst thing that customers sooner or later emigrate, that is , run to the competition.
In this way, it is impossible for the company to achieve two important goals: to grow and to remain.
So far, it is very important to note that our corporate culture is too inclined or inclined to focus on reducing costs and expenses when there are two more important alternatives under the basic financial objective; these are:
Income generation and resource management. And this is because the cost reduction has a limit while the other two alternatives offer a lot of options.
Let’s look at an example of a company that practices the strategy of reducing costs and expenses to increase profits and that this company serves its market with several products and at any time decides to abandon several of them to devote to produce the most lucrative. With this strategy, it is likely to improve short-term profits, but it could open up the possibility of competition taking advantage of the space represented by the neglected market with less profitable products and directing a penetration strategy towards other customers, which in the long run would mean loss of market penetration with consequent effects on profits.
This decision to eliminate product lines should go beyond mere consideration of the utility they produce and should include other factors of a strategic nature that could lead the company to accept the sacrifice of short-term profits to ensure long-term permanence and growth.
Seen all above, we can conclude the following:
The basic financial objective, understood as the maximization of utility, does not guarantee the company’s permanence and growth. Maximizing profits alone is a short-term concept. Profiting must be based more on a long-term strategy than on the uncontrolled exploitation of the different opportunities that the market offers to the company.
The basic financial objective should be seen from a long-term perspective, since in many cases it is possible that utility sacrifices in the short term will help ensure permanence and growth.
All these wrong practices in relation to the basic financial goal, make many entrepreneurs who, in search of optimum profits, do not mind sacrificing quality and customer service. With which they motivated the failure of their companies. If this is your case, it is still time to correct and apply smarter strategies to maintain your company.
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