Objectives of Financial Management
Financial Management refers to the process of efficient acquisition, utilization, and distribution of finance and then disposal of surplus or profit to run the organization smoothly. Financial management helps in finding the answer to various questions like what should be the size and composition of fixed assets, what should be the amount and composition of current assets, what should be the amount of long-term and short-term financing, what should be the fixed debt-equity ratio in the capital, etc.
Objectives of Financial Management
A financial manager is responsible for making the decisions to bring effective financial management to the organization. His/her decisions should be gainful for the shareholders as well as the company. So the decisions which increase the value of the share in the market are considered to be good and fruitful. Increased value of shares fulfills many other objectives also but it does not means that the manager should use manipulative activities to raise the prices of the shares. This boom must come with the growth of the organization, with the increase in profits, and with the satisfaction of all the parties which are directly or indirectly associated with the firm.
Some of the prime objectives of financial management are as follows:
1. Profit Maximization
A business is set up with the main aim of earning huge profits. Hence, it is the most important objective of financial management. The finance manager is responsible to achieve optimal profit in the short run and long run of the business. The manager must be focused on earning more and more profit. For this purpose, he/she should properly use various methods and tools available.
2. Wealth Maximization
Shareholders are the actual owners of the company. Hence, the company must focus on maximizing the value or wealth of shareholders. The finance manager should try to distribute maximum dividends among the shareholders to keep them happy and to improve the goodwill of the company in the financial market. The declaration of dividend and payout policy is decided with the help of financial management. A proper dividend policy related to the declaration of dividends or retaining the company's profit for future growth and development is part of dividend decisions. But this is based on the performance of the company and the amount of profit earned. Better performance means a higher value of shares in the financial market. In nutshell, the finance manager focuses on maximizing the value of shareholders.
3. Maintenance of Liquidity
With the help of proper financial management, the manager can easily monitor the regular supply of liquidity in the company. But it is not as easy as it sounds. To maintain the proper cash flow, the manager must keep an eye over all the inflows and outflows of money to reduce the risk of underflow and overflow of cash. The finance manager is responsible to maintain an optimal level of liquidity in the organization. Healthy cash flow means a higher possibility of survival and success of the business. Because it helps the business to deal with uncertainty, timely payment of dues, getting cash discounts, making day-to-day payments without delays, etc.
4. Proper Estimation of Financial Requirements
Financial management also helps the finance manager in estimating the proper financial needs of the company. This means the estimations related to the requirement of capital to start or run a business, the need for fixed and working capital of the company, etc., can be done with effective management of finance. If this management will not be present in the company then there will be a higher possibility of having a shortage or surplus of finance. For this estimation, a financial manager checks various factors like the technology used by the organization, the number of employees working, the scale of operations, and the legal requirements of the company to run its business.
5. Proper Mobilization
Financial management helps in the effective utilization of sources of finance. It means without wasting them and getting the maximum benefit from the available resources. The finance manager is responsible for managing the different sources of funds such as shares, debentures, bonds, loans, etc. So, after estimating the financial requirements, the manager must decide which source of the funds he/she should use to avail the maximum benefit.
6. Proper Utilization of Financial Resources
With proper financial management, the organization can make optimum utilization of financial resources. To achieve this, a financial manager has various tools that he/she can use. They include managing receivables, better management of inventory, and effective payment policy in hand. This will not only save the finance of the organization but will also reduce the wastage of other resources.
7. Improved Efficiency
Financial management is also beneficial in increasing the efficiency of all sections and departments of the organization. If the finance is effectively distributed to all the departments then they will work efficiently. It will support the company to achieve its targets easily which will be further helpful for the growth of the entire company.
8. Meeting Financial Commitments with Creditors
Financial management is helpful in the timely payment of dues to the creditors. The financial manager can list out the creditors, their due amount, and due date from the financial accounts and can make their payments on time. This will increase the goodwill of the company in the market and creditors will also provide the goods to the company on credit without having any problem. So, if there will be strong management of finance then the company will be able to meet the financial commitments with creditors easily.
9. Creating Reserves
The business environment is full of uncertainty such as sudden changes in customers' preferences, climate change, natural calamity, change in technology, etc. To overcome such unplanned issues, the company should have a sufficient amount in the form of reserves. The company can create reserves over the year by having an optimal dividend payout policy. The company should also keep some part of profits in the form of reserves. The reserves are not only helpful in dealing with unwanted situations but also to expand the business and face contingencies in the future. This benefit can only be taken if the company has effective management of finance.
10. Decreases the Cost of Capital
This objective includes measuring the cost of capital, risk evaluation, and calculating the approximate profits out of a particular project. Financial managers are responsible for the effective investments of available funds in the current or fixed assets to get the maximum benefits or ROI.
11. Decreases Operating Risk
There are lots of risks and uncertainties that a financial manager has to face in the day-to-day operations of the business. Financial management helps in reducing these issues and gives the solutions to deal with the problems. It can avoid the high-risk allocation of capital for the expansion and growth of the business. Other than this, FM also tells how the decisions can be taken with a proper consultancy.
12. Balanced Structure
Financial management also provides a balanced capital structure to the company. In other words, it brings a proper balance between the various sources of capital such as loans, equity, bonds, retained earnings, etc. This balance is required for flexibility, liquidity, and stability in the organization as well as the economy.
13. Developing Financial Scenarios
With the help of financial management, financial scenarios can be developed. It can be done by forecasts and the current state of the company. But for this purpose, the financial manager has to assume a wide range of possible outcomes as per the current and future market conditions.
14. Measure Your Success
The prime motive of any organization is to earn huge profits. So, we can say that the success of a company is based on its revenue. Financial management not only helps in earning more revenue but also in measuring the success of the company. With proper financial reports or accounts, the organization can compare its current year's performance with the previous year's performance.
Other than this, the financial manager can also compare the performance of the organization with the performance of the competitors in the market. Such information motivates the management team as well as all the employees to work harder for the company's growth.
15. Optimizing Marketing Activities
Marketing plays a huge role in the revenue of a firm. A company advertises its products or services through different means of marketing. But marketing is a department that demands more funds. So, before investing in any advertising campaign, it is a must to figure out what return the company can get from investing in that campaign. And if the program is not giving the expected returns to the company then it should be optimized or temporarily stopped. That's why the financial manager should check the reports prepared by the marketing department regarding the returns from any advertising campaign and then he/she should manage and allocate the funds by keeping the results in mind.
16. Business Survival
In this era of high competition, it is not easy for a company to survive in the market and earn profits. Hence, the finance manager should take the big decisions carefully after consulting with the experts.
If the company follows perfect financial management then it can get the benefits of all the given objectives which will be helpful in the long-run survival of the business with a higher turnover and goodwill.