What are objectives of financial management?

Objectives of
Financial
Management
What are Objectives of Financial
Management? with Describe
Definition, Meaning, Nature and
Scope!

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Financial Management: it’s Definition, Meaning and
Objectives!
Definition: One needsmoney to make money. Financeis the life-blood of
businessand there mustbe a continuousflow of fundsin and outof a business
enterprise. Money makesthe wheels of businessrun smoothly. Sound plans,
efficient production system and excellent marketing network are all
hampered in the absence of an adequate and timely supply of funds. Sound
financial managementis as importantin businessas production and
marketing. A business firm requires finance to commenceits operations, to
continueoperationsand for expansion or growth. Finance is, therefore, an
importantoperativefunction of business.

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A large business firm has to raise fundsfrom severalsourcesand has to utilize
those fundsin alternativeinvestmentopportunities. In order to ensurethe
most judicious utilization of fundsand to providea reasonablerate of return
on the investment, sound financialpolicies and programmesare required.
Unwisefinancingcan drivea business into bankruptcy justas easily as a poor
product, ineptmarketingor high production costs.
On the other hand, adequate and economical financingcan providethe firm a
differentialadvantagein the market place. The success of a business
enterpriseis largely determined by the way its capital fundsareraised,
utilized and disbursed. In the modern money-usingeconomy, theimportance
of financehas increased further dueto increasing scale of operationsand
capital intensivetechniques of production and distribution. In fact, financeis
the bright thread runningthroughall business activity. It influencesand limits
the activities of marketing, production, purchasingand personnel
management. The success of a business is measured largely in financial terms.
The efficient organization and administration of the finance function isthus
vital to the successful functioningof every businessenterprise.
Meaning of Financial Management: Financial managementmay be defined
as planning, organizing, directingand controlling the financialactivities of an
organization. Accordingto Guthman and Dougal, financialmanagement
means, “the activity concerned with the planning, raising, controlling and
administeringof fundsused in the business.” It is concerned with the
procurementand utilization of fundsin the proper manner. Financial
activities deal with not only the procurementand utilization of fundsbutalso
with the assessing of needsfor funds, raisingrequired finance, capital
budgeting, distribution of surplus, financialcontrols, etc.
EzraSolomon has described the natureof financial managementas follows:
“Financial managementis properly viewed asan integral part of overall
managementrather than as a staff specially concerned with fundsraising
operations. In this broader view, the central issue of financial policy is the

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wise useof fundsand the central process involved isa rational matching of
the advantageof potential usesagainst the cost of alternative potential
sourcesso as to achieve the broad financial goals which an enterprisesets for
itself. In addition to raising funds, financialmanagementis directly concerned
with production, marketingand other functionswithin an enterprise
whenever decisionsare made about the acquisition or distribution of funds.”

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Objectives of Financial Management
Financial managementis one of the functionalareas of business. Therefore, its
objectives mustbe consistent with the overall objectives of business. The
overall objective of financialmanagementis to providemaximum return to
the ownerson their investmentin the long- term.
This is known aswealth maximization. Maximization of owners’wealth is
possible when the capital invested initially increases over a period of time.
Wealth maximization means maximizingthe marketvalueof investmentin
shares of the company.
The main objectives offinancial management are: -
 Profit maximization: The main objective of financialmanagementis
profitmaximization. The financemanager tries to earn maximum

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profitsfor the company in the short-term and the long-term. He cannot
guarantee profitsin the long term because of businessuncertainties.
However, a company can earn maximum profitseven in the long-term,
if: -
The Financemanager takes proper financialdecisions.
He uses the finance of the company properly.
 Wealth maximization: Wealth maximization (shareholders' value
maximization)is also the main objective of financial management.
Wealth maximization means to earn maximum wealthfor the
shareholders. So, the financemanager tries to give a maximum dividend
to the shareholders. He also tries to increase the market valueof the
shares. The market valueof the shares is directly related to the
performanceof the company. Better the performance, higher is the
market valueof shares and vice-versa. So, the finance manager musttry
to maximize shareholder'svalue.
 Proper estimation of total financial requirements: Proper estimation of
total financialrequirementsis a very importantobjective of financial
management. The finance manager mustestimate the total financial
requirementsof the company. Hemust find outhow muchfinance is
required to start and run the company. Hemust find outthe fixed
capital and workingcapital requirementsof the company. His
estimation must be correct. If not, there will be shortage or surplusof
finance. Estimating the financial requirementsis a very difficultjob. The
financemanager mustconsider many factors, such as the typeof
technology used by the company, number of employeesemployed, a
scale of operations, legal requirements, etc.
 Proper mobilization: Mobilization (collection) of financeis an important
objective of financial management. After estimating the financial
requirements, the financemanager must decideabout the sourcesof
finance. He can collect financefrom many sourcessuch as shares,
debentures, bank loans, etc. There mustbe a proper balance between

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owned financeand borrowed finance. The company mustborrow
money at a low rate of interest.
 Proper utilization of finance: Proper utilization of financeis an
importantobjective of financial management. The finance manager
mustmake optimum utilization of finance. He mustuse the finance
profitable. He mustnot waste the financeof the company. Hemustnot
invest the company'sfinancein unprofitableprojects. He must notblock
the company'sfinancein inventories. Hemust have a short credit
period.
 Maintainingproper cash flow: Maintainingproper cash flow is a short-
term objective of financial management. The company musthave a
proper cash flow to pay the day-to-day expensessuchas a purchaseof
raw materials, paymentof wages and salaries, rent, electricity bills, etc.
If the company hasa good cash flow, it can take advantageof many
opportunitiessuchas getting cash discountson purchases, large-scale
purchasing, giving credit to customers, etc. A healthy cash flow
improvesthe chances of survivaland success of the company.
 Survivalof company: Survivalisthe most importantobjective of
financial management. The company mustsurvivein this competitive
businessworld. The financemanager mustbe very carefulwhile making
financial decisions. One wrongdecision can make the company sick, and
it will close down.
 Creating reserves: One of the objectives of financialmanagementis to
create reserves. The company mustnotdistribute the full profitas a
dividend to the shareholders. It mustkeep a part of it profitas reserves.
Reservescan be used for futuregrowthand expansion. It can also be
used to face contingencies in the future.
 Proper coordination: Financialmanagementmust try to have proper
coordination between the financedepartmentand other departmentsof
the company.
 Create goodwill: Financial managementmusttry to create goodwillfor
the company. Itmust improvethe image and reputation of the company.

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Goodwillhelps the company to survivein the short-term and succeed in
the long-term. It also helps the company duringbad times.
 Increase efficiency: Financial managementalso tries to increase the
efficiency of all the departmentsof the company. Proper distribution of
financeto all the departmentswillincrease the efficiency of the entire
company.
 Financial discipline: Financial managementalso tries to create a
financial discipline. Financial disciplinemeans: -
To invest financeonly in productiveareas. This will bring high returns
(profits) to the company.
To avoid wastage and misuseof finance.
 Reducecost of capital: Financialmanagement tries to reducethe cost of
capital. That is, it tries to borrow money at a low rate of interest. The
financemanager mustplan the capital structure in such a way that the
cost of capital is minimized.
 Reduceoperatingrisks: Financial managementalso tries to reducethe
operating risks. There are many risksand uncertainties in a business.
The financemanager must take steps to reducethese risks. He must
avoid high-risk projects. He mustalso take proper insurance.
 Preparecapital structure: Financialmanagement also preparesthe
capital structure. It decides the ratio between owned financeand
borrowed finance. It brings a proper balance between the different
sourcesof. capital. This balance is necessary for liquidity, economy,
flexibility, and stability.
Wealth of shareholders = Number of shares held ×Marketprice per share.
In order to maximize wealth,financial management must achieve the
following specific objectives:
(a) To ensureavailability of sufficientfundsatreasonable cost (liquidity).

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(b) To ensureeffective utilization of funds(financialcontrol).
(c) To ensuresafety of fundsby creating reserves, re-investing profits, etc.
(minimization of risk).
(d) To ensure adequatereturn on investment(profitability).
(e) To generate and build-up surplusfor expansion and growth(growth).
(f) To minimizecost of capital by developinga sound and economical
combination of corporate securities (economy).
(g) To coordinatethe activities of the financedepartmentwith the activities of
other departmentsof the firm (cooperation).
Profit Maximization:Very often maximization of profits is considered to be
the main objective of financial management. Profitability is an operational
concept that signifies economic efficiency. Some writerson financebelieve
that it leads to efficient allocation of resourcesand optimum useof capital.
It is said that profit maximization is a simpleand straightforward objective. It
also ensuresthe survivaland growthof a business firm. Butmodern authors
on financial managementhave criticized the goal of profitmaximization.
Ezra Solomonhas raisedthe following objections against the profit
maximizationobjective:
Objections against the Profit MaximizationObjectives:
(i) The concept is ambiguousor vague. It is amenable to different
interpretations, e.g., long run profits, short run profits, volumeof profits, rate
of profit, etc.

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(ii) It ignores the timing of returns. It is based on the assumption of bigger the
better and doesnot take into accountthe time value of money. The valueof
benefits received today and those received a year later are not the same.
(iii) It ignores the quality of the expected benefits or the risk involved in
prospectiveearningsstream. The streams of benefits may have varying
degrees of uncertainty. Two projectsmay have sametotal expected earnings
but if the earningsof onefluctuate less widely than those of the other it will be
less risky and morepreferable. Moreuncertain or fluctuatingthe expected
earnings, lower is their quality.
(iv) It does not consider the effect of dividend policy on the market price of
the share. The goal of profit maximization implies maximizingearningsper
share which is not necessarily the same as maximizingmarket-priceshare.
Accordingto Solomon, “to the extent paymentof dividendscan affect the
market priceof “the stock (or share), the maximization of earnings per share
will not be a satisfactory objective by itself.”
(v) Profitmaximization objective does nottake into consideration the social
responsibilities of business. It ignoresthe interests of workers, consumers,
governmentand the public in general. The exclusiveattention on profit
maximization may misguidemanagers to the pointwhere they may endanger
the survivalof the firm by ignoringresearch, executive developmentand
other intangible investments.
Wealth Maximization:Prof. EzraSolomon has advocated wealth
maximization as the goal of financial decision-making. Wealth maximization

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or net presentworth maximization is defined as follows: “The gross present
worth of a courseof action is equal to the capitalized valueof the flow of
futureexpected benefits, discounted (or as capitalized) at a rate which reflects
their certainty or uncertainty.
Wealth or net presentworth is the differencebetween gross presentworth
and the amountof capital investmentrequired to achieve the benefits being
discussed. Any financialaction which creates wealth or which has a net
presentworth above zero is a desirable oneand should be undertaken. Any
financial action which does not meet this test should be rejected. If two or
moredesirable courses of action are mutually exclusive(i.e., if only onecan be
undertaken), then the decision should be to do that which creates most wealth
or shows the greatest amountof net presentworth. In short, the operating
objective for financial managementis to maximize wealth or net present
worth.”
Wealth maximizationis more operationally viable and valid criterion
because of the following reasons:
(a) It is a preciseand unambiguousconcept. The wealth maximization means
maximizingthe market valueof shares.
(b) It takes into accountboth the quantity and quality of the expected steam of
futurebenefits. Adjustmentsaremadefor risk (uncertainty of expected
returns)and timing (time valueof money)by discountingthe cash flows,
(c) Asa decision criterion, wealth maximization involvesacomparison of
valueof cost. It is a long-term strategy emphasizingthe use of resourcesto
yield economic valueshigher than joint valuesof inputs.

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(d) Wealth maximization is not in conflict with the other motiveslike
maximization of sales or market share. It rather helps in the achievement of
these other objectives. In fact, achievement of wealth maximization also
maximizes the achievement of the other objectives. Therefore, maximization
of wealth is the operating objective by which financialdecisions should be
guided.
The abovedescription reveals that wealth maximization is more usefulif
objective than profit maximization. It viewsprofitsfrom the long-term
perspective. The trueindexof the valueof a firm is the market price of its
shares as it reflects the influenceof all such factors as earningsper share,
timing of earnings, risk involved, etc.
Thus, the wealth maximization objective impliesthat the objective of financial
managementshould be to maximizethe market price of the company’sshares
in the long-term. It is a true indicator of the company’sprogressand the
shareholder’s wealth.
However, “profit maximization can be part of a wealth maximization strategy.
Quite often the two objectives can be pursued simultaneously butthe
maximization of profitsshould never be permitted to overshadow the broader
objectives of wealth maximization.

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Explanationof Nature and Scope of Financial Management
Financial management is oneof the importantaspects of finance. Nobody
can ever think to start a businessor a company withoutfinancial knowledge
and managementstrategies. Finance linksitself directly to severalfunctional
departmentslike marketing, production, and personnel. Herewewill list out
some of the major scopesof financial managementnotes which will help you
in your decision-makingprocess.
Financial management hasa wide scope. According to Dr. S. C. Saxena, the scope
of financial management includesthe following five A's.
 Anticipation: Financial managementestimates the financialneedsof
the company. That is, it findsouthow muchfinanceis required by the
company.
 Acquisition: It collects financefor the company from differentsources.

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 Allocation: It uses this collected financeto purchasefix and current
assets for the company.
 Appropriation: It dividesthe company'sprofitsamongthe
shareholders, debentureholders, etc. It keeps a part of the profitsas
reserves.
 Assessment: It also controls all the financial activities of the company.
Financial managementis the most importantfunctionalarea of
management. All other functionalareas such as production
management, marketingmanagement, personnelmanagement, etc.
depend on Financialmanagement. Efficient financialmanagementis
required for survival, growth, and success of the company or firm.
Key Scope of Financial Management
The major scope of financial management isdivided into four categories. Let's
learnand understand the nature and scope of financial management through
the below detailsnotes.
Investment Decision: Evaluatingthe risk involve, measuringthe cost of fund
and estimating expected benefits from a projectcomes under investment
decision. It is one of the importantscopes of financialmanagement. The two
major componentsof investmentdecision are Capital budgetingand liquidity.
Capital budgetingis commonly known asthe investmentappraisal. It deals
with the allocation of capital and fundsin such a manner that they will yield
earnings in future. Capitalbudgeting determinesthe long-term investment
which includesreplacementand renovation of old assets. It is all about
maintainingan appropriatebalance between fix and currentassets in order to
maximizeprofitability and to maintain desired liquidity in the firm for its
smooth functioning.
Working Capital Decision: Decisions related to workingcapital is another
crucial scope of financial management. Decisionsinvolvingaround working
capital and short-term financingare known asa workingcapital decision. It
also manages the relationship between short-term assets and its liabilities.
Short-term assets includecash in hand, receivables, inventory, short-term
securities, etc. Creditors, bills payable, outstandingexpenses, bank overdraft,
etc. are a firm’sshort-term liabilities. Short-term assets can exchange for cash

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within one calendar year. Similarly, the liabilities are to settle within an
accounting year.
Dividend Decision: The Dividend Decision playsa crucial role in today’s
corporate era. It determinesthe amountof taxation that stockholders pay. A
good dividend policy helpsto achieve the objective of wealth maximization.
Distributing the entire profit in the form of dividendsor distributingonly a
certain percentage of it is decided by dividend policy. Itis known asdeciding
the optimum dividend payoutratio i.e. proportion of netprofits to be paid out
to shareholders. Stability of cash dividendsand stock sets the parameter
which determinesthe number of investmentopportunities. Expansion of an
economic activity dependson the effectiveness of dividend decisionsand
scope of financial management.
Financing Decision: FinancingDecisions focuseson the accountabilities and
stockholders’ equity sideof the firm’sbalance sheet, for example, the decision
to issue bondsis a kind of financingdecision. The main aim of financing
decision is to cover expensesand investments. The decision involves
generating capitals by variousmethods, from differentsources, in relative
proportion and consideringopportunity costs, with respect to time of
flotation of securities, etc.
The scopeof financial managementis to meet the expenses of the firm, a
suitable capital structurefor the enterprise should develop by the finance
manager. Only an optimum financemix can maximize the marketprice of the
company’sshares in the long run. To decreasethe risk, a stable equilibrium is
required between debt and equity. Return and risk to the equity shareholders
depend on how optimally the debts and financial leverages are using. Only
when the risk and return are in synchronization, the marketvalueper share is
maximized. The apt timing for raising fundsis to decideby the financial
manager time to raise the funds.
Nature of Financial Management
Finance managementis a long-term decision-makingprocesswhich involvesa
lot of planning, allocation of funds, disciplineand muchmore. Let us

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understand thenatureof financialmanagement with referenceto this
discipline.
 Finance managementis one of the importanteducation which has to
realize worldwide. Now aday’speopleare undergoingthrough various
specialization coursesof financial management. Many peoplehave
chosen financial managementas their profession.
 The natureof financial managementis never a separate entity. Even as
an operationalmanager or functionalmanager one has to take
responsibility for financialmanagement.
 Finance is a foundation of economicactivities. The person who Manages
financeis called the financialmanager. An importantrole of a financial
manager is to control financeand implementthe plans. For any
company financialmanager playsa crucial role in it. Many timesit
happensthat lack of skills or wrongdecisions can lead to heavy losses to
an organization.
 Natureof financial managementis multi-disciplinary. Financial
managementdependsupon variousother factorslike accounting,
banking, inflation, economy, etc. for the better utilization of finances.
 An approachto financialmanagementis no limit to businessfunctions
but it is a backbone of commerce, economic and industry.
Scope & Elements of Financial Management
 Investment decisions: Includeinvestmentin fixed assets (call as
capital budgeting). Investmentin currentassets is also a part of
investmentdecisions call for workingcapital decisions.
 Financial decisions: They relate to the raising of financefrom various
resourceswhich will depend upon thedecision on the typeof source,
the period of financing, cost of financingand the returnsthereby.
 Dividend decision: The finance manager has to take a decision with
regardsto the net profitdistribution. Net profits are generally divided
into two: 1) The dividend for shareholders-Dividend and therate of it
has to decide. 2) Retained profits- Amountof retained profits has to
finalizewhich will depend upon expansion and diversification plansof
the enterprise.

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Reference
1. Key Scope of Financial Management -
http://wikifinancepedia.com/finance/financial-
management/nature-and-scope-of-financial-management
2. Scope of Financial Management - http://kalyan-
city.blogspot.in/2011/09/what-is-financial-management-
meaning.html
3. Scope & Elements -
http://www.managementstudyguide.com/financial-
management.htm
4. Definition, Meaningand Objectives -
http://www.yourarticlelibrary.com/financial-
management/financial-management-its-definition-meaning-and-
objectives-discussed/27963

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