Financial management assures that an adequate amount of cash is always accessible in the business from different sources and also offers the greatest return on your investments. It is the duty of senior executives to define the milestones, goals and objectives of financial management to be attained by the company.
The primary goal of every corporation should be to enhance the economic well-being of its shareholders. It aims to accomplish two primary financial management objectives for an organization which are wealth maximization and profit maximization. All financial management choices are made with an emphasis on accomplishing these two important goals.
Primary Objectives of Financial Management
Making wise financial decisions demands a solid knowledge of business goals. Funding decisions enable management measure the activities to be done and the policies to be followed. However, one of the most debated objectives of financial management is Profit Maximization. Here we will learn about some of the other key elements which are as important as profit maximization under financial management objectives.
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.
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.
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.
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.
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.
It is one of the primary objectives of financial management goals. The ultimate goal of a business or an individual is profit maximization. Profit maximization is a state where Marginal Cost (MC) is equal Marginal Revenue (MR). 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 which is one of the financial management objectives
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
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.
According to this viewpoint, all objectives of financial management activities which improve profits should be undertaken and which reduce earnings should be avoided. Select the resources, projects and decisions that are lucrative and reject those that are not profitable.
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Financial Management Basics For Beginners
- Chapter 1: What is Financial Management with Examples
- Chapter 2: Importance of Financial Management
- Currently Reading: Objectives of Financial Management
- Chapter 4: Functions of Financial Management
- Chapter 5: Types of Financial Management
- Chapter 6: Nature and Scope of Financial Management
- Chapter 7: Investment Valuation and Project Valuation Methods and Techniques
- Chapter 8: Goals of Financial Management
- Chapter 9: Financial Management Process
- Chapter 10: Financial Management Notes
- Chapter 11: Financial Management for Startups
- Chapter 12: Financial Management for IT Services
- Chapter 13: Financial Management Quiz - Question and Answers
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