What are the main objectives of financial management? Briefly explain.
Meaning: - Financial Management is a specialized function of general management. It refers to the management of business funds. It is mainly concerned with raising finance and its effective utilization for the achievement of goals of the organization.
Definition: -"financial Management is concerned effective use of an important economic resource, namely capital funds."
- Profit Maximisation: -
Profit Maximization is a basic principle of any business activity. According to this principle, all functions of business aim at a profit. The principle of 'profit maximization is a traditional concept. It is based on the assumption that 'profit is a tool of measuring the success of business firm'. In simple words, the business firm should undertake only such activities that increase profit. The business activities which decrease profit should be avoided.
Profit maximization is considered to be the most important business objective because of the following reasons:
- It is difficult for a business to survive without profit.
- Profit is a tool for measuring the success of a business firm.
- High-level profitability results in better returns (dividend) to the shareholders.
- High-level profitability can generate funds, which can be used for future expansion of the business firms.
- Profit maximization has to be achieved for socio-economic welfare.
- Wealth Maximization: -
According to Prof. Solomon Ezra, the ultimate goal of financial management should be the maximization of owners' wealth.
According to him, the maximization of profit is unreal and half motive. The proper aim of financial management is the wealth maximization of equity shareholders.
Wealth maximization is also known as 'value maximization'. It means maximizing the net present value of a firm.
The focus of financial management is on wealth maximization of its owners' i.e. suppliers of equity capital. The wealth of shareholders is reflected in the market value of the shares. So wealth maximization means the maximization of the market price of shares. The wealth of equity shareholders is maximized only when the market value of equity shares is maximized.
The objectives of financial management can be listed as :-
- To ensure regular and adequate supply of funds
- To ensure adequate return to the shareholders
- To ensure optimum utilisation of funds
- To ensure safety of investment
- To plan sound capital structure that is to maintain of a balance between debt and equity