What Does Financial Management Mean?
Financial Management is the functional area of business that includes planning, organizing, directing, and controlling financial activities. It involves applying of general management principle and utilization of funds and resources of the enterprise.
10 Main Objectives of Financial Management
Every company tries to hire the best financial management team for itself. Financial managers are the highest-paid employees of almost all companies. Here we have a few objectives of financial management: –
1. Profit Maximization
Profit maximization is one of the most important objectives of financial management for the business. In this technique, the financial manager proposes a strategy to maximize the profit of the enterprise in the short run or long run. The company’s finances are used to drive the strategy to attain the utmost profit. The factors which affect profit maximization are a measurement of performance, location, resources, maximization of social welfare, and sources of incentives.
The strategies of a financial manager help face adverse business conditions and are mostly risk-free. The rankings to all the businesses are given based on the profits earned. The profit maximization is justified on the grounds of rationality so everyone wants to earn the maximum profits. The drawbacks of proper mobilization are that it is not precise, ignores the value of money, and involves risk.
2. Wealth Maximization
Wealth maximization is the technique of maximizing the profit of shareholders. In this method, the manager concerned with finance tries to give maximum dividends to the shareholders by deciding dividend declaration and payout policy. Wealth maximization is also known as the net present value (NPV) maximization approach.
The advantages of this approach are that it makes use of cash flow instead of accounting profit which helps to reduce the risk and avoid ambiguity. The importance is given to time value money by discount rate and interest rate reduction. It is the modern approach with a wider scope. The growth in the number of shares also increases the wealth of the shareholder by directly increasing the EPS of the organization.
3. Full Mobilization
Full mobilization is one of the objectives of financial management that focuses on the long-term. It is the effective use of sources of income such as shares, bank loans, and debentures, etc. Thus, the main aim of the entrepreneur is to earn the maximum profit and get great rewards. It reduces the risk and meets the social needs as well.
The factor on which proper mobilization works in balancing the production of products and meeting the demands of customers. The money must be borrowed by the company at a low rate of interest. There must be a balance between the owned finance and the borrowed finance by the organization.
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4. Increase Efficiency
Increasing efficiency comes in the workload of your financial management. Increasing efficiency includes the proper distribution of funds to all the sections of the company. Your financial management strategy should intend you to maximize the shareholder’s profit, meet the customer’s needs and increase the demands of the products. The image and the reputation of the company must be improved.
This will help the company to succeed in the long run and survive all the difficulties in the short run. All of these will increase the efficiency of the company, this is one of the most important objectives of financial management.
5. Appropriate Assessment of Overall Financial Needs
In this technique, the manager needs to estimate the funds required to set up the company, generate the image in the market, and then all the after functioning of the company.
All the suggestions such as the number of employees required, technology to be used by the company, operations to be performed by the company, and the legal requirements must be provided by the financial management of the company. There must not be a shortage of surplus finance for running the company.
6. Use Funds Correctly
The finances must be used for ensuring cash flow within the company for short-term and long-term expenses including wage and salary payments, raw materials, utility bills, etc.
The benefits of proper utilization of the cash flow generated can help the company in the long run by providing or enabling long-term purchasing, cash discounts, giving credit to customers, etc. This will help the company.
7. Survival Of Company
The survival of the company, in the long run, is the major concern for many entrepreneurs who start their company. The financial management of the company needs to be strong and accurate for the success and survival of the company.
A single misinformed decision can shut down the company and lead it to great loss. There is no secret for overnight success so all the algorithms of the company should be studied deeply before any changes or updating.
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8. Creating Reserves
The company should be ready for any kind of misfortune or risk. The reserves of the company play a great role in saving the company from such situations. The reserves are also used to expand the operations or the service/product of the company. The company should focus on creating reserves for the whole year by having an optimal dividend pay-out policy. Thus, distributing the whole of the profit to shareholders as dividends can be a fatal decision of the company in the long run.
9. Reduce the Cost of Capital
Every financial manager of the company tries to reduce the cost of capital and plans the structure of the company in such a way that money from banks or the funds to be borrowed is always borrowed at lower rates of interest.
The responsibility of managing the funds and investing the funds in certain assets to get the results is also the major step in reducing the cost of capital.
10. Reduce Operating Risks
Every business involves one or the other kind of risk. Maximizing the profit, wealth along with managing the risk factor is the main aim of financial management.
In India, it is already hard to build a business and it takes a lot of effort so risks are a must. The decisions of the company shall be taken by a proper consultancy for avoiding high-risk allocation of capital for expansion.
These are the objectives of financial management. Every financial manager in a company must be well-versed with these objectives of financial management and accordingly must frame financial decisions inside the company. It is also important for the upper management and all those influential to the decisions of the company to know about the objectives of the financial management.
Frequently Asked Questions
What are the biggest financial assets?
Every financial manager uses stocks, and bonds as the most important financial assets. These decide how long can the company survive in the competitive world and succeed in the long run.
What are the biggest financial liabilities for a company?
Debts taken by the company are one of the biggest liabilities. Apart from that, every company has a regular expense that is the working capital. This includes paying salaries to employees, rents, utility bills, etc.
What types of financial management are there?
Financial management works basically with two different approaches. The first one is the traditional approach which primarily focuses on institutional structures. The financial management of sources of finances and utilization of infrequent events like liquidation, reorganization, etc comes under the traditional approach.
The second method is the modern approach which focuses on an analytical viewpoint. The arrangement of funds is a fundamental feature of the modern approach. The analysis of capital budgeting, financial planning, and working capital management for better wealth utilization comes under the modern approach.
What are the limitations of the objectives of financial management?
There are various limitations of financial management:
What are the best criteria for evaluating and calculating the performance of a finance manager?
The companies’ profit, wealth, maximizing shareholder wealth, and maximizing the company share market price are the major work assets of a finance manager.