Almost all economics textbooks take profit maximization as the enterprise goal, but financial management thinks that profit maximization has many shortcomings, and puts forward various optional goals, among which enterprise value maximization is the main one. But in fact, profit maximization not only has no insurmountable defects, but also is a commanding and decisive goal, which is the premise for other financial goals to be realized. On the contrary, the defect of maximizing enterprise value is even more insurmountable. Therefore, financial management should also aim at maximizing profits.

Keywords: enterprise goal; Maximize profits; Maximize enterprise value; Economics; financial management

In economics, the goal of an enterprise is to pursue "profit maximization", which is almost recognized. However, in financial management, there are various views on financial management objectives, including profit maximization, asset profit margin maximization, earnings per share maximization, shareholder wealth maximization, enterprise value maximization and so on. And most people think that the goal of "profit maximization" is not enough, and that "shareholder wealth maximization or enterprise value maximization" should be the goal of enterprise financial management.

Why can't the enterprise goal of "profit maximization" recognized in economics become the universally recognized goal in financial management? Is there an organic internal connection between the various objectives of financial management? This paper intends to discuss these problems and try to draw the conclusion that financial management should also aim at "profit maximization" and its reasons.

First, the mainstream view: the lack of profit maximization and enterprise value maximization advantages

(A) the lack of profit maximization

Profit maximization is the theoretical basis of classical microeconomics, and economists usually analyze and evaluate the behavior and performance of enterprises with the concept of profit maximization. Profit in economics refers to the total income MINUS the total cost of an enterprise, but the cost includes accounting cost and opportunity cost, so it corresponds to two different concepts: accounting profit and economic profit. The former is total income minus accounting cost, that is, various actual expenses in the production process of an enterprise, while the latter is total income minus accounting cost and then minus opportunity cost. Profit maximization in economics generally refers to the maximization of economic profit. In accounting, because cost is strictly defined as cost and expense, profit refers to the balance of income MINUS cost and expense. In financial management, profit maximization refers to "assuming that the expected return on investment of enterprises is determined, financial management behavior will develop in a direction conducive to profit maximization of enterprises."

Taken together, the shortcomings of the profit maximization goal are mainly manifested in the following aspects:

First, profit maximization is an absolute index, regardless of the input-output relationship of enterprises. For example, it also made a profit of 6.5438+0 million yuan. One enterprise contributed 5 million yuan, and the other enterprise contributed 7 million yuan. If we do not consider the amount of capital invested, it is difficult to make a correct judgment and comparison only from the absolute amount of profits.

Second, profit maximization does not consider the time when profits occur and the time value of funds. For example, this year's profit is 6.5438+0 million yuan, and next year's profit is 6.5438+0 million yuan. If the time value of money is not considered, it is difficult to accurately judge which one is more in line with the enterprise's goals.

Third, profit maximization fails to effectively consider the risk issue, which may make financial personnel pursue profit maximization regardless of the risk. For example, the same investment is 6,543,800 yuan, and the profits this year are all 6,543,800 yuan, but the profits of one enterprise have all been converted into cash, and the other enterprise has all been shown as accounts receivable. If you don't consider the risk, you can't accurately judge which one is more in line with the enterprise goals.

Fourth, profit maximization often makes the financial decision-making behavior of enterprises tend to be short-term, and only pursues the increase of profits unilaterally, without considering the long-term development of enterprises.

(B) the advantages of maximizing enterprise value

Generally speaking, the enterprise value is "how much is the enterprise itself worth". [1] P9 Enterprise value can usually be expressed in two ways: one way is to determine the market value of the enterprise through market evaluation through buying and selling; The second is to express it through the present value of its future expected cash flow. Maximizing enterprise value is an abstract goal. Under the assumption of capital market efficiency, it can be expressed as the maximization of stock price or the maximization of enterprise market value.

It is generally believed that maximizing enterprise value as the financial management goal of an enterprise has the following advantages:

First of all, the goal of value maximization considers the time factor of obtaining cash income, and scientifically measures it with the time value principle of money to reflect the potential or expected profitability of enterprises, so as to consider the time value and risk of funds, which is conducive to overall planning, rational selection of investment schemes, effective financing and rational formulation of dividend policies.

Secondly, the goal of maximizing value can overcome the short-term behavior of enterprises in pursuit of profits. Because not only the past and present profits will affect the value of the enterprise, but also the expected future cash profits will have a greater impact on the value of the enterprise.

Thirdly, the goal of value maximization scientifically considers the relationship between risk and return, which can effectively overcome the wrong tendency of enterprise financial managers to pursue profits unilaterally regardless of risk.

Second, the comparative analysis of profit maximization and enterprise value maximization

The above shortcomings of profit maximization and advantages of enterprise value maximization represent the mainstream view of financial management at present, and are also the basis of financial management with enterprise value maximization as its financial management goal. But the author has different views on this.

(A) the above shortcomings of profit maximization are not insurmountable.

Economics believes that a complete theory should include definition, hypothesis, hypothesis and prediction, in which hypothesis refers to "conditions applicable to a certain theory". And that "any theory is conditional and relative, so assumptions are very important in the formation of theories ... without certain assumptions, analysis and conclusions are meaningless." [2]P 18 Similarly, if the assumption of profit maximization is taken into account, the shortcomings of profit maximization mentioned above are not insurmountable, on the contrary, they can be completely derived from it, and a correct comparison and judgment can be made.

First, about "absolute indicators". Indeed, profit maximization is an absolute indicator, but only for a single enterprise, we usually assume that "other conditions remain unchanged" and the amount of funds invested is equal. If you want to compare two or more enterprises, even if the profit and input are different, you can draw a correct conclusion by relaxing the hypothesis, that is, by its deformation index profit rate, such as the profit rate of total assets or the profit rate of self-owned funds.

Second, about "the time when profits occur". Generally speaking, the profit in profit maximization refers to the current profit. If two or more enterprises have the same conditions except the difference of profits, including the time when profits are generated, we can certainly make a correct judgment according to the size of profits. If the time of profit generation is different, then correspondingly, we only need to discount and compare the profits in different periods, which will not affect us to make correct decisions at all.

Third, about "the risk of profit". If the profit is the same, but the risk of obtaining the profit is different, because it violates the assumption that other conditions are the same, then the profit can be converted into the value under the same risk coefficient according to the risk coefficient and compared, and the correct conclusion can be drawn.

Fourth, about "short-term behavior". Although profit maximization is the current indicator, the short-term decision with the goal of profit maximization may not be the optimal decision in the long run, but the constraints of short-term and long-term are different, so we can't compare the advantages and disadvantages of different choices. Just as the short-term minimum average cost is higher than the long-term average minimum cost, the short-term profit maximization decision is far from the long-term optimal decision, but it is still the optimal decision under short-term constraints. And no matter what kind of decision we make, of course, we must take into account the long-term factors, but because of information asymmetry, the shorter the term, the more specific the constraints, so that the consequences of the decision can be accurately expected.

So in my opinion, if all other conditions except profit are the same, such as capital invested, time generated and risk, we can certainly make a correct judgment of "which is better or worse" according to the absolute value of profit. Even if other conditions such as invested capital, generated time and risks are different, we can either deform or discount the profits or consider the risk coefficient to make correct comparisons and decisions. From this point of view, the above-mentioned shortcomings of taking profit maximization as the goal of enterprise financial management are not insurmountable and will not affect our correct decision-making and judgment. In this regard, this article will do further analysis later.

(B) the shortcomings and defects of maximizing enterprise value

Although the index of enterprise value considers the time and risk of obtaining cash income, so that it can be directly judged when the time and risk are different, this index also has the following shortcomings, even more insurmountable than the shortage of profit maximization:

First of all, it is also an absolute index, regardless of the relationship between input and output of enterprises. For example, just a year ago, Company A and Company B invested 6.5438+0.8 million yuan and 5 million yuan respectively. Now the value of Enterprise A is 6.5438+0.8 million yuan, while the value of Enterprise B is 6.5438+0.8 million yuan.

Worth 6 million yuan. If you are an investor, which company should you choose? Of course, this can also be compared by its deformation like profit, but it is enough to show that the maximization of enterprise value is not better than the profit maximization index in this respect.

Secondly, it is difficult to estimate this value in detail and the operability is not strong. The calculation of profit is simple and easy to operate. For example, the "reverse cost method" of Handan Iron and Steel Co., Ltd. first determines the income and profit targets of the enterprise, and then deducts the target cost as the basis for assessment and control. In contrast, the enterprise value is not only difficult to estimate concretely, but also infeasible. For listed companies, the enterprise value is directly expressed as the circulating market value, which is of course intuitive and concrete. But in China, even listed companies have non-circulating state-owned shares and legal person shares, so how to measure the value of these shares? If it can't be measured directly, how to estimate the enterprise value and make financial decisions accordingly? If only refers to the market value of circulation, then the stock price and the value of the enterprise are changing every day. How to make financial decisions according to the ever-changing enterprise value when making decisions? Enterprise value has been changing, should financial decisions also be changing all the time? Of course, this is impossible, so in this case, how can the enterprise value guide the financial decision-making of the enterprise?

Third, the application scope of enterprise value is limited. No matter what kind of enterprise, the profit can be directly calculated by "income-cost" and directly reflected in the income statement as the operating results of the enterprise. In contrast, the estimation of enterprise value is much more complicated. As mentioned above, if the capital market is efficient, the market value of an enterprise can be measured by the stock price. However, due to the limitation of China's national conditions, this method is greatly restricted, especially for one-person sole proprietorship, partnership and unlisted companies. For these three types of enterprises, there are two ways to estimate the enterprise value, one is to determine it through market evaluation in the form of buying and selling, and the other is to estimate it through the present value of its expected future cash flow. The former needs asset appraisal or public auction, and cannot be carried out continuously. Moreover, due to the influence of evaluation standards and methods, it is difficult to achieve objective and accurate evaluation, which leads to the difficulty in measuring enterprise value. The latter needs to be able to accurately estimate the expected cash flow in the future, which is actually impossible due to the uncertainty and information asymmetry in the future. Therefore, if the goal of enterprise financial management is to maximize the value, if it is reasonable for listed companies with full circulation, then single ownership enterprises, partnerships and unlisted companies are difficult to apply in practical work due to various conditions.

Finally, the enterprise value is influenced by many uncontrollable factors, so it is easy to mislead the financial decision-making of enterprises. Although the corporate value of listed companies can be revealed by the change of stock price, the stock price is the result of many factors, many of which are beyond the control of enterprises themselves, such as systemic risks brought about by macroeconomic fluctuations and irrational expectations of investors. Therefore, if the maximization of value is the goal of enterprise financial management, on the one hand, it may make enterprises only pay attention to the stock price and deviate from the industry itself, misleading enterprise financial decision-making, on the other hand, it will also induce enterprises to publish false information conducive to the rise of stock price.

Third, the internal relationship between financial objectives such as profit and enterprise value.

(A) the relationship between profit and asset profit rate, earnings per dividend and earnings per share

In financial accounting, the calculation formulas of profit, asset profit rate and profit per share are as follows:

1. profit

Total profit = operating profit+investment income+subsidy income+non-operating income-non-operating expenditure+previous year's profit and loss adjustment.

Net profit (after-tax profit) = total profit-income tax expense

In which: operating profit = main business profit+other business profit-management expenses-financial expenses.

Main business profit = main business income-main business cost-operating expenses-main business taxes and surcharges

2. Profit rate of assets

Return on net assets = after-tax profit/owner's equity × 100%

Profit rate of total assets = after-tax profit/total assets × 100%

3. Dividend earnings per share and earnings per share

Profit per share = profit after tax/total share capital

Earnings per share are consistent with profits per share, which means that the company's profits (which can be divided into pre-tax and after-tax) in a certain period of time are divided by the total share capital. After-tax earnings per share are commonly used, and the calculation formula is: earnings per share = after-tax profit/total share capital.

As can be seen from the above formula, the profit rate of assets, earnings per share and earnings per share are directly determined by after-tax profits under the condition that other conditions such as owner's equity, total assets and total share capital remain unchanged. So as far as a single enterprise is concerned, if the goal of maximizing profits is achieved, as long as other conditions remain unchanged, then other goals will naturally be achieved. On the other hand, if the profit is not maximized, the above other indicators cannot be maximized. Therefore, profit maximization is a necessary and sufficient condition for maximizing asset profit rate, profit per share or earnings per share.

(B) the relationship between profit and shareholder wealth and enterprise value

1. Shareholder wealth and enterprise value

Since shareholders are for the company, shareholder wealth is the market value of the company shares owned by shareholders. It can be determined by the number of shares owned by shareholders, dividends per share and stock market price. With the number of shares unchanged, the wealth of shareholders mainly depends on the dividends paid to shareholders and the stock price. At any time, the wealth of shareholders can be calculated as follows: (1) multiply the current dividend per share by the number of shares held; (2) multiply the current stock price by the number of shares held; (3) The value of shareholders' wealth can be obtained by adding the dividend amount calculated above to the stock market value. The value of an enterprise is that it can bring future returns to investors. Similarly, at any point, the enterprise value is equal to the total dividend that the company can distribute plus the total market value of the stock. If it is a joint-stock company, then the two are consistent. [3]P 1 1 Shareholder-only wealth focuses more on a single shareholder, while the focus of enterprise value is mainly on the whole enterprise. But if you add up the wealth of all shareholders, it is consistent with the value of the enterprise. This is also the reason why many textbooks and articles call it "maximization of shareholder wealth or maximization of enterprise value". Therefore, the following focuses on the relationship between profit and enterprise value.

Four. conclusion

(a) Profit is a supreme and decisive goal.

Although there are many views on the goal of financial management, in my opinion, except the goal of maximizing profits, all other goals directly depend on the degree of realization of this goal. Some goals, such as asset profit rate, earnings per share, earnings per share, etc., will naturally be achieved if the profit maximization goal is achieved. Some goals, such as shareholder wealth and enterprise value, are related to factors other than profit, but these factors are either uncontrollable exogenous variables of the enterprise or directly determined by the profit of the enterprise. In essence, without enterprises, there would be no enterprise financial management; In addition to financial management, enterprises also have human resource management and production management. Therefore, the enterprise goal is the overall goal, and financial management can only be the sub-goal or sub-goal of the enterprise goal, and it must serve and obey the enterprise goal.

(b) Financial management should also aim at maximizing profits.

Although there are different views on financial management objectives in theory, and most of them advocate "maximizing enterprise value" as the financial management objective, this has not shaken the dominant position of "maximizing profit" as the financial management objective in practice. There are survey data as evidence:

-According to a systematic survey of the world's top 500 senior financial managers by western financial scientists, the results show that most practitioners rank the financial management objectives in order of importance: first, return on total assets maximization; Second, realize the expected growth rate of earnings per share; Third, the maximization of the total profit of the company in the current period; Fourth, maximize the stock price. [1] p9 It can be seen that among the above four objectives, the first and third objectives are actually profit maximization (the first is the transformation of profit maximization, with the purpose of comparison among different companies); The second and fourth goals, according to the analysis of this paper, are also directly determined by the degree of profit maximization. So this survey shows that profit maximization is actually the first choice goal of most practitioners.

-Some scholars in China have done similar surveys. The results show that 85% of enterprise managers in the survey think that the goal of financial management should be to maximize enterprise value, but in reality, 55% of enterprises adopt profit maximization as the goal of financial management. [4]P9 Practice is the only criterion for testing truth. In my opinion, 85% of the above figures are undoubtedly caused by all kinds of "misleading" in theory, while 55% in reality is more "real" and therefore more objective.

On the one hand, because the financial management of an enterprise depends on the existence of the enterprise, the financial management goal must serve and obey the enterprise goal, which we have to admit: "Fundamentally speaking, the financial goal depends on the enterprise survival goal or enterprise goal". [9] But on the other hand, we think that the enterprise goal of maximizing profits is insufficient, and we want to replace it with maximizing enterprise value. Then there is the enterprise price.

Pay attention to this "more perfect and reasonable" goal, how to serve the "congenital deficiency" profit maximization goal? Why has it failed to replace profit maximization as the goal of enterprises so far? In my opinion, profit maximization should undoubtedly be the goal of financial management, and financial management must serve to achieve this goal, otherwise it will inevitably lead to the double paradox of theory and practice.

[References]

[1] Wang Bin. Financial management [M]. Beijing: China Central Radio and TV University Press. 2002.

[2] Liang Zhu. Western economics [M]. Beijing: Central Radio and TV University Press. 2002.

[3] Liu eping. Modern enterprise financial management [M]. Guangzhou: Sun Yat-sen University Press. 1998.

[4] National Accounting Professional and Technical Qualification Examination Leading Group Office. Financial management [M]. Beijing: China Financial and Economic Publishing House.

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