Goals of fm ppt

Goals of Financial management

1. FINANCIAL
MANAGEMENT
TOPIC : GOALS OF FINANCIAL MANAGEMENT

2. INDEX
FINANCEIN GENERAL SENSE
FINANCE IN COMMERCE
FINANCIAL MANAGEMENT ( FM)
GOALS OF FM
PROFIT
PROFIT MAXIMIZATION
WEALTH
WEALTH MAXIMIZATION

3. WHATISFINANCE? INGENERALSENSE!
Finance is nothing but an exchange of available
resources. Finance is not restricted only to the
exchange and/ormanagementofmoney.
A barter trading system is also a type of finance.
Thus, we can say,
“Finance is an art of managing various available
resources like money, assets, investments,
securities, etc.”

4. WHATISFINANCE? INCOMMERCE!
Fundsortheprovisionoffunds.
Toprovideorobtainfunds,capital,orcredit.
Tomanageorsecurefinancialresources.

5. FINANCIALMANAGEMENT.
ACCORDING TO WESTON AND BRIGHAM
“Financial Management is an area of financial
decision making, harmonizing individual motives
and enterprise goals.”

6. GOALSOFFINANCIALMANAGEMENT
All businesses aim to maximize their profits,
minimize their expenses and maximize their market
share.

7. SPECIFIC OBJECTIVES
PROFIT MAXIMIZATION
WEALTH MAXMIZATION

8. WHATISPROFIT?
A financial gain, especially the difference between
the amount earned and the amount spent in buying,
operating, or producing something
advantage; benefit.

9. PROFITMAXIMIZATION
Profit maximization, in financial management,
represents the process or the approach by which
profits (EPS) of the business are increased.

10. In simple words, all the decisions whether
investment, financing, or dividend etc are focused
to maximize the profits to optimum levels.
All the decision with respect to new projects,
acquisition of assets, raising capital, distributing
dividends etc are studied for their impact on profits
and profitability
If the result of a decision is perceived to have
positive effect on the profits, the decision is taken
further for implementation.

11. BENEFITSOFPROFITMAXIMIZATION
Economic Survival:Profit maximization theory is
based on profits and profits are a must for survival
of any business.
Measurement Standard:Profits are the true
measurement of viability of a business model.
Without profits, the business losses its primary
objective and therefore has a direct risk on its
survival.
Social and Economic Welfare:The profit
maximization objective indirectly caters to social
welfare.
Max share holder return

12. LIMITATIONSOFPROFITMAXIMIZATION
Haziness of the concept “Profit”:The term
“Profit” is a vague term. It is because different
mindset will have different perception about profit.
There is no clear defined profit maximization rule
about the profits.
Ignores Time Value of Money:The profit
maximization formula simply suggests “higher the
profit better is the proposal”. In essence, it is
considering the naked profits without considering
the timing of them. Another important dictum of
finance says “a dollar today is not equal to a dollar
a year later”. So, the time value of money is
completely ignored.

13. Ignores the Risk:A decision solely based on profit
maximization model would take decision in favorof
profits. In the pursuit of profits, the risk involved is
ignored which may prove unaffordable at times
simply because higher risks directly questions the
survival of a business.
Ignores Quality:The most problematic aspect of
profit maximization as an objective is that it ignores
the intangible benefits such as quality, image,
technological advancements etc. The contribution
of intangible assets in generating value for a
business is not worth ignoring. They indirectly
create assets for the organization.

14. RULED OUT
Profit maximization ruledthe traditional business
mindset which has gone through drastic changes.

15. WHATISWEALTH?
An abundance of valuable possessions or money.
A plentiful supply of a particular desirable thing.

16. WEALTHMAXIMIZATION
Wealth maximization is a modern approach to financial
management. Maximization of profit used to be the main
aim of a business and financial management till the
concept of wealth maximization came into being. It is a
superior goal compared to profit maximization as it takes
broader arena into consideration. Wealth or Value of a
business is defined as the market price of the capital
invested by shareholders.

17. Wealth maximization simply means maximization of
shareholder’s wealth. It is combination of two words viz.
wealth and maximization. Wealth of a shareholder
maximize when the net worth of a company maximizes.
To be even more meticulous, a shareholder holds share
in the company /business and his wealth will improve if
the share price in the market increases which in turn is a
function of net worth. This is because wealth
maximization is also known as net worth maximization.
Finance managers are the agents of shareholders and
their job is to look after the interest of the shareholders.
The objective of any shareholder or investor would be
good return on their capital and safety of their capital.
Both these objectives are well served by wealth
maximization as a decision criterion to business.

18. BETTERTHANPROFITMAXIMIZATION
Firstly, the wealth maximization is based oncash flowsand not
profits. Unlike the profits, cash flows are exact and definite and
therefore avoid any ambiguity associated with accounting profits.
Secondly, profit maximization presents ashorter termview as
compared to wealth maximization. Short term profit maximization
can be achieved by the managers at the cost of long term
sustainability of the business.
Thirdly, wealth maximization considers thetime value of money.
It is important as we all know that a dollar today and a dollar one
year latter do not have the same value. In wealth maximization,
the future cash flows are discounted at an appropriate
discounted rate to represent their present value.
Fourthly, the wealth maximization criterion considers therisk and
uncertainty factorwhile considering the discounting rate. The
discounting rate reflects both time and risk. Higher the
uncertainty, the discounting rate is higher and vice-versa.

19. CONCLUSION
In summary, the wealth maximization as an
objective to financial management and other
business decisions enables the shareholders
achieve their objectives and therefore is superior to
profit maximization. For financial managers, it is a
decision criterion being used for all the decisions.

20. THANKYOU
CREDITS: MS. SHOBAB G