Existence of any goal or an objective helps to decide whether or not the financial decision or the strategic plans are effective for an individual. Objectives of financial management is the parameter set to achieve the optimal usage of funds for client’s best interest. For example:
- Ensuring continuous and adequate supply of funds to the concern.
- Managing high returns on investment to the shareholders. ROI is directly proportional to earning capacity, market price of the share and expectations of the shareholders.
- Utilizing the funds to its optimal potential. After procuring the funds financial manager builds a strategic plan to utilize them at minimum risk and cost respectively.
- Planning and administrating a robust capital structure. An ideal economic activity has a sound and fair composition of to ensure the balanced ratio between debt and equity capital.
- Securing the future by ensuring Safe and high return on investment.
However, one of the most debated objectives of financial management is Profit Maximization.
According to several traditional arguments, the ultimate goal of a business or an individual is profit maximization. Profit maximization is a state where Marginal Cost is equal Marginal Revenue. Now, it is often argued that this objective is way too vague and narrow. But supporting arguments give their counterpart by mentioning the efficiency of an individual and how it is measured on the scale of profit maximization.
The profit maximization condition of the firm can be expressed as:
Maximize π (Q)
Where π (Q) =R (Q)-C (Q)
Where π (Q) is profit, R (Q) is revenue, C (Q) are costs, and Q are the units of output sold.
The two marginal rules and the profit maximization condition stated above are applicable both to a perfectly competitive firm and to a monopoly firm.
Features of Profit Maximization:
Here will we look into some of the features of profit maximization under objectives of financial management.
- The primary goal of any economic activity is to earn profit; hence the finance manager aims to explore every possible way to enhance the profit maximization.
- Profit indicates the stability and development of any economic activity. It determines the efficiency of any business.
- Profit reduces business risk and increases the potential to meet social needs as well.
- It is the primary source of finance.
Criticism of Profit Maximization Theory:
The theory has been criticized by many economists. Following are the criticism of Profit Maximization theory
1. Profits are uncertain owing fluctuating difference between revenue generated and incurring costs in the future. In practical life anything is possible. Your calculations based on today’s numbers might change tomorrow and the difference between your expected result and the reality might as well be surprising.
2. Businessmen are not bothered by MC and MR. As a matter of fact it rarely happens that they are familiar with these two terms and their functions. It is because most of the businessmen are not greedy and their primary goal is not earning profit. J. Hawkins says on the matter that believing that every businessmen aims to maximize profit and nothing else is same as believing that students study to maximize their examination marks.
3. Insufficient knowledge is another drawback of profit maximization. The theory is based on several hypothetical assumptions and on the fact that mangers are aware of almost everything. But in reality they don’t possess the precise and entire information about the state under which the particular economic activity is being implemented.
Other Key Objectives of Financial Management:
Here we will learn about some of the other key elements which are as important as profit maximization under financial management objectives.
1. Wealth Creation:
Wealth creation is one of the main objectives of financial management. You can take the advice of financial consultant for various investment opportunities to create wealth. Finance manager provides you best investment options with highest rate of returns based on past performance. For example: investing in stocks, gold, commodities, forex, mutual funds, etc. You can take the advice to maximize your wealth.
2. Appropriate Estimation of Finance Requirement:
It is one of the important objectives of financial management. Appropriate estimate will help you to take right decision at the right time. For example: company requires working capital, infrastructure, and employees to run or start the business. If estimate is incorrect then it will directly affect the business plans. Shortfall of cash or finance may lead to either shutdown or change in business plans. Failing to estimate will directly or indirectly effect the operations of a company.
3. Survival of Company:
For any company to survive, financial management is a primary objective. In today’s competitive world, there are various pre-determined expenses whereas there are many expenditures which occurs suddenly. When you are managing company, it become primary objective to look after budget and any direct or indirect expenditures. Failing to manage finance will lead to company sickness and any even lead to shut down.
4. Maintaining Cash Flow:
One of the short-term objectives of financial management strategy is to manage cash flow of a company or an individual. There are various types of expense incurred on daily basis. For example: salaries, operational expenses, rent, contractual expenses for a company. Whereas expenses like telephone bills, electricity bills, house maintenance, children education expenses occurs in an individual life. One should know to manage your cash flow and savings for their economic growth.
5. Optimization on Cost of Capital:
For a company, long-term objectives of financial management is to minimize the cost of expenditure and maximize gains from operations. Initially for any company expenses are more than the income. But gradually once business is stable, company look forward for optimization on cost of capital investment as a part of their financial management strategies.
- Tutorial Course - Financial Management Basics For Beginners -
» e-Learning Chapter 1: What is Finance? Definition, Types, Source, Features and Importance
» e-Learning Chapter 2: What is Financial Management? Definition, Examples and its Importance
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» e-Learning Chapter 6: What is Corporate Finance? Definition, Roles, Principles and Importance
» e-Learning Chapter 7: Investment Valuation and Project Valuation Methods and Techniques
» e-Learning Chapter 8: What is Working Capital Management? Definition, Importance and Objectives
» e-Learning Chapter 9: What is Financial Risk Management? Definition, Methods and Techniques
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