Financial management principles and practices

Financial Perspective

The goal of the firm from a financial perspective is to earn profit for the shareholders. The shareholders are the owners of the firm, and the firm exists to give them a return on their investment. If the firm did not seek to give shareholders a return, the shareholders would invest elsewhere. The firm's primary financial objective, therefore, is to earn profit that can be returned to shareholders either in the form of capital gains or in the form of dividends.

The firm will also have a number of secondary financial objectives that will each help to contribute to the earning of profit. There are many common examples of secondary financial objectives. These can be to increase revenue, to cut costs, to increase margins, to increase market share or to reduce taxation. All of these would lead the firm to a variety of strategies, but each if executed would serve the purpose of increasing profits. So the path that each firm takes to increase its profits is the decision of the managers of the company, and each company will ultimately select different paths. However, all companies have as their overall goal the objective of increasing profit.

The financial perspective tends to emphasize the value of the shareholder above all else. The shareholder is the person who invests in the company and wants to see a return on that investment. The stakeholder approach differs from the financial or shareholder approach, in that the needs of a wider variety of constituents are taken into consideration. The stakeholder approach holds that many people, not just investors, have a stake in the firm. As well, the stakeholder approach specifically states that "values are necessary and explicitly a part of doing business," implying that paying attention to these values via the stakeholder approach is critical (Freeman, Wicks, Parmar, 2004).

First and foremost, the employees and managers of the company are stakeholders. Their stake is not direct -- they did not invest in the company -- but their ongoing livelihoods are at stake, so the company needs to take that into consideration. Others also rely on the company as well -- suppliers, partners and customers in particular. All of these stakeholders have a stake in the outcomes of the company, so therefore management should take their needs into account when making decisions.

Stakeholder theory has also been extended to more tangential stakeholders, such as local governments, local populations and the environment. Critical to this thinking is that any person, body or even locality that is affected by the actions of the firm should be given due thought when the company is making decisions. The environment is a good example of this, because the company operates in a given community and destroying the environment of that community does affect the company as well. The outcome of the extended stakeholder approach is that managers need to take a wider variety of concerns and outcomes into consideration in their decision-making processes.

It has also been argued by some that by taking a broader stakeholder perspective, the financial perspective benefits as well. Actions that produce better outcomes will lead to better financial outcomes. For example, treating employees well will result in lower turnover and therefore better performance. The same can be said about customers. Damage to the environment has negative short-term financial consequences but also long-term consequences as the company must face a damaged world that is tougher to do business in.