What Does Financial Management Mean?
- What Does Financial Management Mean?
- 10 Main Objectives of Financial Management
- Final Thoughts
- Frequently Asked Questions
- What are the biggest financial assets?
- What are the biggest financial liabilities for a company?
- What types of financial management are there?
- What are the limitations of the objectives of financial management?
- What are the best criteria for evaluating and calculating the performance of a finance manager?
Financial management is a company activity that encompasses the planning, arranging, directing, and managing of financial activities. It entails the application of general management principles as well as the efficient use of the company’s cash and resources.
10 Main Objectives of Financial Management
Every business strives to assemble the best financial management team possible. Almost all companies’ highest-paid personnel are financial managers. These are some financial management objectives:
1. Profit Maximization
Profit maximization is one of the most significant financial management objectives for a company. The financial manager develops a strategy to optimize the company’s profit in the short or long term using this technique. The company’s finances are used to drive the profit-maximizing strategy. Profit maximization is influenced by factors such as performance measurement, location, resources, social welfare maximization, and incentive sources.
A financial manager’s strategies assist in dealing with poor business conditions and are often risk-free. All firms are ranked according to how much money they make. Profit maximization is justified by rationality, thus everyone wants to make the most money possible. The disadvantages of proper mobilization include the lack of precision, disregard for the worth of money, and risk.
2. Wealth Maximization
The approach of maximizing shareholder profit is known as wealth maximization. By deciding on dividend declaration and payout policy, the finance management seeks to deliver the maximum dividends to the shareholders. The net present value (NPV) maximizing strategy is also known as wealth maximization.
The benefits of this method include the utilization of cash flow rather than accounting profit, which helps to decrease risk and eliminate uncertainty. Discount rates and interest rate reductions place a premium on time value money. It is a more comprehensive version of the current approach. The increase in the number of shares enhances the shareholder’s wealth by directly boosting the company’s EPS.
3. Full Mobilization
One of the long-term financial management objectives is full mobilization. It is the efficient use of income sources such as stocks, bank loans, and debentures, among others. As a result, the primary goal of an entrepreneur is to make the most money and reap the greatest rewards. It lowers the risk while also meeting social demands.
The aspect on which proper mobilization works in balancing product output and meeting customer needs. The money must be borrowed at a low interest rate by the company. There must be a balance between the organization’s own finances and its borrowed funds.
Recommended: Financial Management’s Purpose
4. Increase Efficiency
The workload of your financial management becomes more efficient. The proper allocation of finances to all areas of the organization is part of increasing efficiency. Your financial management approach should aim to maximize shareholder profit while also meeting consumer needs and increasing product demand. The company’s image and reputation must be upgraded.
This will help the company prosper in the long run while also allowing it to weather the storm in the short term. All of these will improve the company’s efficiency, which is one of the most essential financial management goals.
5. Appropriate Assessment of Overall Financial Needs
In this method, the management must estimate the cash required to establish the company, create a market image, and then oversee the company’s ongoing operations.
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 funds must be used to ensure the company’s cash flow for short- and long-term expenses such as wage and salary payments, raw materials, electricity bills, and so on.
Proper cash flow management can benefit the organization in the long run by allowing or enabling long-term purchasing, cash discounts, and consumer credit, among other things. This will benefit the business.
7. Survival Of Company
Many entrepreneurs who are just starting out are concerned about their company’s long-term sustainability. The company’s financial management must be robust and accurate in order for it to succeed and survive.
A single erroneous judgment might bring the company to a halt and result in significant losses. Because there is no magic formula for overnight success, all of the company’s algorithms should be thoroughly examined before any adjustments or updates are made.
Recommended: Financial Management Functions
8. Creating Reserves
Any misfortune or risk should be anticipated by the company. The company’s reserves play a critical role in rescuing the company from such crises. The reserves are also utilized to grow the company’s operations or service/product. By having an optimal dividend pay-out policy, the company can focus on building reserves for the entire year. As a result, delivering the entire profit to shareholders as dividends may be a company’s catastrophic decision in the long run.
9. Reduce the Cost of Capital
Every company’s financial manager strives to reduce the cost of capital, and the company’s structure is designed in such a way that money borrowed from banks or funds to be borrowed are always borrowed at lower interest rates.
The responsibility for managing funds and investing them in specific assets to achieve the desired objectives is also a significant step in lowering the cost of capital.
10. Reduce Operating Risks
Every organization is exposed to some level of risk. The primary goal of financial management is to maximize profit, wealth, and risk management.
Building a business in India is already difficult and time-consuming, so taking risks is essential. To avoid high-risk capital allocation for expansion, the company’s decisions should be made by a qualified consultant.
These are the financial management objectives. Every financial manager in a firm must be familiar with these financial management objectives and must design financial decisions inside the organization accordingly. It is also critical for higher management and all individuals who have a say in corporate choices to be aware of the financial management objectives.
Frequently Asked Questions
What are the biggest financial assets?
Stocks and bonds are the most significant financial assets for every financial manager. These factors determine how long the company can compete and succeed in the long run.
What are the biggest financial liabilities for a company?
One of the company’s largest liabilities is its debts. Aside from that, every business has a recurring expense called working capital. This involves paying employee salaries, rent, and utility costs, among other things.
What types of financial management are there?
Essentially, there are two approaches to financial management. The traditional method, which focuses mostly on institutional structures, is the first. The traditional strategy covers financial management of sources of funds and the use of infrequent events such as liquidation, restructuring, and so on.
The modern approach, which relies on an analytical viewpoint, is the second way. A key feature of the modern approach is the allocation of funds. The modern approach examines capital budgeting, financial planning, and working capital management for optimal wealth usage.
What are the limitations of the objectives of financial management?
Financial management has a number of drawbacks:
What are the best criteria for evaluating and calculating the performance of a finance manager?
A finance manager’s main work assets include the company’s profit, wealth, maximizing shareholder wealth, and maximizing the company’s share market price.