Firms : Types, Objectives & Goals

FIRMS : TYPES, OBJECTIVES & GOALS

MEANING OF FIRM

Definition of firm

A firm is the small business unit involved in producing the profit Business (company, enterprise or firm) is a legally recognized organization designed to provide goods or services, or both, to consumers, businesses and governmental entities. Businesses are predominant in capitalist economies. Most businesses are privately owned. A business is typically formed to earn profit that will increase the wealth of its owners and grow the business itself. The owners and operators of a business have as one of their main objectives the receipt or generation of a financial return in exchange for work and acceptance of risk. Notable exceptions include cooperative enterprises and state-owned enterprises. Businesses can also be formed not-for-profit or be state-owned.

Types of firms

Sole proprietorship:

A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has personal liability of the debts incurred by the business.

Partnership:

A partnership is a form of business in which two or more people operate for the common goal which is often making profit. In most forms of partnerships, each partner has personal liability of the debts incurred by the business. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships.

Corporation:

A corporation is either a limited or unlimited liability entity that has a separate legal personality from its members. A corporation can be organized for-profit or not-for-profit. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. In addition to privately owned corporate models, there are state-owned corporate models.

Cooperative:

Often referred to as a "co-op", a cooperative is a limited liability entity that can organize for-profit or not-for-profit. A cooperative differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

GOALS OF FIRMS:

Conventional theory of firm assumes profit maximization is the sole objective of business firms. But recent researches on this issue reveal that the objectives the firms pursue are more than one. Some important objectives, other than profit maximization are:

(a)   Maximization of the sales revenue

(b)   Maximization of firm‘s growth rate

(c)   Maximization of Managers utility function

(d)   Making satisfactory rate of Profit

(e)   Long run Survival of the firm

(f)   Entry-prevention and risk-avoidance

Profit Business Objectives:

Profit means different things to different people. To an accountant ―Profitǁ means the excess of revenue over all paid out costs including both manufacturing and overhead expenses. For all practical purpose, profit or business income means profit in accounting sense plus non-allowable expenses.

Economist‘s concept of profit is of ―Pure Profitǁ called ‗economic profit‘ or ―Just profitǁ. Pure profit is a return over and above opportunity cost, i. e. the income that a businessman might expect from the second best alternatives use of his resources.

Sales Revenue Maximisation:

The reason behind sales revenue maximisation objectives is the Dichotomy between ownership & management in large business corporations. This Dichotomy gives managers an opportunity to set their goal other than profits maximisation goal, which most-owner businessman pursue. Given the opportunity, managers choose to maximize their own utility function. The most plausible factor in manager‘s utility functions is maximisation of the sales revenue.

The factors, which explain the pursuance of this goal by the managers are following:.

First: Salary and others earnings of managers are more closely related to sales revenue than to profits Second: Banks and financial corporations look at sales revenue while financing the corporation. Third: Trend in sales revenue is a readily available indicator of the performance of the firm.

Maximisation of Firms Growth rate:

Managers maximize firm‘s balance growth rate subject to managerial & financial constrains balance growth rate defined as:

G = GD – GC

Where GD = Growth rate of demand of firm‘s product & GC= growth rate of capital supply of capital to the firm.

In simple words, A firm growth rate is balanced when demand for its product & supply of capital to the firm increase at the same time.

Maximisation of Managerial Utility function:

The manager seek to maximize their own utility function subject to the minimum level of profit. Managers utility function is express as:

U= f(S, M, ID)

Where S = additional expenditure of the staff M= Managerial emoluments

ID = Discretionary Investments

The utility functions which manager seek to maximize include both quantifiable variables like salary and slack earnings; non- quantifiable variables such as prestige, power, status, Job security professional excellence etc.

Long run survival & market share:

According to some economist, the primary goal of the firm is long run survival. Some other economists have suggested that attainment & retention of constant market share is an additional objective of the firm‘s. the firm may seek to maximize their profit in the long run through it is not certain.

Entry-prevention and risk-avoidance, yet another alternative objectives of the firms suggested by some economists is to prevent entry-prevention can be:

1.     Profit maximisation in the long run

2.     Securing a constant market share

3.  Avoidance of risk caused by the unpredictable behavior of the new firms