Goals of an Agribusiness Firm
There are three possible goals of an agribusiness firm, namely-
- Profit maximization
- Maximization of Earning per share
- Maximization of Wealth.
- Goal: Profit maximization:
How Profit could be maximized?
- By reducing cost
- By increasing the price of goods and services through improving quality
- By creating additional demand through advertisement.
Why Profit maximization should not be a Goal of an Agribusiness Firm?
Because the concept of profit is full of ambiguity. Examples are-
- Gross profit or net profit?
- Net profit before (NPBT) tax or net profit after tax (NPAT).
- Short term profit or long term profit?
- Because profit could be manipulated in many ways. Like,
- By delaying payment
- By revaluation of assets
- By huge credit sales which involves the risk of bad debts.
- Because the Profit Maximization goal does not consider the time value of money.
- Because it ignores risk.
- Second Goals of an Agribusiness Firm: Earning per share–
Why the maximization of EPS also should not be a goal?
- Because maximization of EPS again does not consider the time value of money
- Because maximization of EPS does not consider the risk ness of the project
- Because maximization of EPS does not represent the dividend policy of the firm.
- 3rd Goals of an Agribusiness firm: Maximization of Wealth:
Maximization of wealth means maximization of value of the firm which in other words is the maximization of the net present value of the firm.
- Why maximization of wealth is a superior goal of a firm Goal of an Agribusiness Firm?
(i) The concept is free of all ambiguity:
A simple definition is the notion of wealth maximization. The definition of benefit, which is full of uncertainty and insularity, is not based on it. Instead, it is based on the cash flow principle, which is very simple and well understood.
(ii) Time value of money is considered:
The principle of maximization of wealth takes into account the value of capital in time. In reality, a prospective investor discounts the future inflows of the company to be invested to assess the value of a share.
(iii) Risk of the firm considered:
The risk or the firm is also included in this definition. The company’s risk is determined by estimating the likelihood of potential inflows being available. Eventually, the risks related to potential inflows are adjusted by a risk premium.
(iv) Focus on the market price of share:
Only if the value of the business is boosted is the security of the owner (investor) assured. The principle of wealth maximization emphasizes the valuation of the stock, which is the company’s value metric.
Principles of Finance for Agribusiness Firm:
- Principle of Risk and return:
A firm’s every decision entails both risk and return. The greater the risk, the greater the return, and vice versa. A financial planner must make a trade-off between the possible risk involved in the decision and the return involved.
- Principle of Time of Money:
Today’s money and tomorrow’s money do not hold the same value. Usually, at present, 100 taka has a value greater than 100 taka’s than one hundred taka’s to be earned by the end of the year. Therefore the fourth goal of adequately assessing potential return inflows from an investment with a time value factor should be discounted.
- Principle of Cash Flow:
Financial plans should be drawn up on the basis of cash flow rather than benefit from accounting. Currency or liquidity, therefore, is the only form of payment. Until it is converted to currency, the benefit itself can not be used to purchase any product or service.
- Principle of profitability and Liquidity:
The relationship is inverse or negative between liquidity & profitability. In other words, if an investor wants to maximize benefit, he needs to make liquidity sacrifices. On the other hand, if liquidity is to be given, then it is appropriate to hamper profitability. There is therefore a constant struggle between profitability and liquidity, and the financial manager must reconcile the firm’s two competing goals.
- Principle of Matching:
This theory of finance asserts that in terms of length, there should generally be a match between the source and the usage of funds. In other terms, short-term investment funds should be raised from short-term and long-term sources, with most of the funds remaining unused for the remainder of the time. Similarly, if the funds needed for long-term investment are raised from short-term sources, then the company would have a problem with the frequent maturity of the loan.
- Principle of Diversity:
It is also a very important financial accounting concept. The proverb “do not put all your eggs in a basket” is perfectly applicable to the fund’s investment. One should not go to a single industry to spend all its money. His overall investment in various productive sectors should be diversified so that any unforeseen and unforeseeable losses in one sector can be offset by the benefit of another sector. That is how, by minimizing the risk of loss and ensuring full benefit, he can protect his money.
- Principle of Business Cycle:
Both commodities and financial markets are undergoing a boom and contraction. According to this theory, in investing in his fund, the investor should keep sight of the business cycle. Since the business cycle has a definite investment impact.
