Objectives of Financial Management

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Objectives of financial management:

Financial management is a process of managing the finances of the business. All finance come with cost and risk associated with it. To minimise the cost and risk, financial management comes into play and it helps in investment of the finance in the areas where the finance will get higher return than the investment. Financial management is also important for deployment of right amount of finance at the right time and thus making sure the avoidance of shortage or excess finance.

Financial management helps in taking the decisions such as financial decision, dividend decision and investing decision. There are certain objectives of the financial management which are fulfilled which taking these decisions. They are as under:

Objectives of Financial Management

Wealth maximisation

Wealth maximisation concept means to maximise the wealth of the shareholders by increasing the price or value of the shares. Shareholders are called the owners of the business because the company’s fund belongs to them. The price/value of the shares increases when the finance of the business is optimally invested and utilised. When the benefits of the investment exceed the cost of the business then the investment is worth. The financial management helps in taking the decisions regarding finance, investment and dividend and thus add the value, thus increasing the price of the shares.

Profit maximisation

Every economic activity has the aim to earn profit. Similarly, every business concern also aims at earning the profit from the investment made by them. Profit can be maximised only when a business concern is running efficiently and effectively. Although, due to dynamic environment of the business, a financial manager cannot guarantee the profits but he/she can try their best to maximise the profits in a given situation by taking the correct financial decisions, investing in the activity which yields maximum returns along with lower costs and try to maximise the dividends on the shares.

Correct estimation of financial requirements of the business

We can see the future, which is why; we need to plan for the future in advance. Correct estimation is to be made based on the facts, figures and forecasts. The financial manager is responsible for proper estimation of the requirement. If the estimation made by the manager is wrong, it may lead to excess or shortage of the funds. Estimation is based on the type of activity, level of activity, past record of the similar kind of activity, competitor’s strategy etc.

Proper collection

When the estimation is made for the requirement of the finance, it becomes important to analyse different available sources of finance and thus properly collect the funds. There is not a single source of finance. Finance can be taken from the internal sources such as profit earned or retained earnings or from the external sources such as debentures, loan from the financial institutions or banks, trade credit etc. collection of funds depends on various factors such as cost involved, risk associated and returns expected.

Proper utilisation

A financial manager is responsible for proper allocation of the funds acquired. Right amount of money needs to be allocated at the right activity so that optimal utilisation of the funds can take place. It is important to avoid the excess funds/ idle finance to reduce the cost. It is equally important to avoid the shortage of funds which may lead to delay in production or sales.

Survival of the company

Finance acts as the blood of the company and it becomes important to manage the finance so that company can survive. It is a competitive world, to deal with the cut throat competition it becomes important to manage the funds of the company in the best possible manner. Every company tries hard to perform different activities, what makes the difference, is the management of the company. Management is the key to survive, grow, expand and diversify.

Financial discipline

Financial disciple simply means to have control over your money. Financial disciple is required to reach the monetary goals of the business. Every business which invests the funds into the productive areas and thus keep a check on risk and cost involved, are financially disciplined. Financial management is the activity which helps in avoiding the wastage and misuse of funds and helps in keeping aside the funds for the correct activity and helps in avoiding impulse spending.

Planning sound capital structure

Financial management is the process which helps in taking various decisions regarding finance, investment and dividend. Capital structure planning is also involved in financial management. It involves the important decision which includes determining the composition of owner’s fund and borrowed funds. The decisions involved in capital structure directly aim at increasing the wealth of shareholders and this is the very aim of financial management.

Decision making

Decision making is an integral part of management of business finance. It helps in taking the decisions regarding the selection of source of finance which includes least risk and least cost along with taking care of the return expected. There are other three major decisions such as financial decisions (deciding the quantum of finance), investment decision (how the funds are to be invested) and dividend decision (how much is to be distributed to the shareholders and how much is to be retained).

All these objectives of the financial management ultimately are focused on value addition. This value addition is done for increasing the market value of the product. As shareholders are called the owners of the firm and they need to be paid in form of dividend. Other objectives are equally important and each objective is inter – connected to other objectives. such as, having financial disciple will lead to proper utilisation, mobilisation and utilisation of the funds and thus help in profit maximisation.

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