OMTEX CLASSES: Objectives of Financial Management?

Objectives of Financial Management?



Meaning: - Financial Management is a specialised function of general management. It refers to management of business funds. It is mainly concerned with raising of finance and its effective utilization for achievement of goals of the organization.

Definition: -"financial Management is concerned effective use of an important economic resource, namely capital funds."

A.      Profit Maximisation: -
Profit Maximization is a basic principle of any business activity. According to this principle, all functions of business aim at profit. The principle of 'profit maximisation is a traditional concept. It is based on 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 maximisation is considered to be the most important business objective because of the following reasons:
1.       It is difficult for business to survive without profit.
2.       Profit is a tool of measuring the success of a business firm.
3.       High level profitability results in better returns (dividend) to the shareholders.
4.       High level profitability can generate funds, which can be used for future expansion of business firm.
5.       Profit maximisation has to be achieved for socio-economic welfare.

B.      Wealth Maximization: - According to Prof. Solomon Ezra the ultimate goal of financial management should be the maximisation of owners' wealth.
According to him, maximisation of profit is unreal and half motive. The proper aim of financial management is wealth maximisation of equity shareholders.
        Wealth maximization is also known as 'value maximization'. It means maximising 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 market value of the shares. So wealth maximisation means the maximisation of market price of shares. The wealth of equity shareholders is maximized only when market value of equity shares is maximized.

                Equity shares are traded in share market. The share price of a company, quoted in share market index, is a reflection of its earning capacity, dividend and retention policy. Financial decision making should aim at maximizing market value of equity shares of company.