Explaining the Goal of Financial Management and the Role of Ethics Essay

It has always been the goal of the financial managers to maximize the wealth of the shareholders of the firm. That is to say, we maximize the potential benefits that the firm’s stakeholders get by increasing the value of the firm in which these shareholders have taken the risk of investing to. According to Ingram (1992), the worth of a company is dependent on the capacity of the assets to produce cash flows over a period of time.

This means that if the firm is able to generate a positive net cash flow including a reasonable dividend to its owners, then it said that value is created. Firms face two kinds of profits. They are accounting profits and economic profits. Maximizing accounting profits normally refers to the general corporate goal of maximizing profits as maximizing economic profits generally refers to maximizing the shareholder’s wealth.

Ingram (1992) has distinguished them by defining accounting profits as the income accumulated after the overall cost is deducted from the overall revenue before the payment to shareholders is considered and economic profits as the income accumulated after compensating for the factors of production such as capital, labor and others. Moreover, she differentiated the two by saying that accounting profit does not consider all the factors of production as economic profit does and that it also does not consider compensating the shareholders for taking the risk in investing in the firm.

Maximizing wealth does not consequently mean that the firm has to face an unethical decision making. It is still up to the firm as to how it will perform this task. As according to Goizueta (1997), everyone in the company would be better of if it plans for a long-term goal rather than a short-term goal. Through this, the firm can still plan on how it will maximize the wealth and at the same time be consistent with ethical standards.

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