What are objectives of financial management?

What are Objectives of Financial Management? with Describe Definition, Meaning, Nature and Scope! Financial management is one of the functional areas of business. Therefore, its objectives must be consistent with the overall objectives of the business. The overall objective of financial management is to provide maximum return to the owners on their investment in the long- term. This is known as wealth maximization. Maximization of owners’ wealth is possible when the capital invested initially increases over a period of time. Wealth maximization means maximizing the market value of investment in shares of the company.

1. 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 needs money to make money. Finance is the life-blood of
business and there must be a continuous flow of funds in and out of a business
enterprise. Money makes the wheels of business run 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 management is as important in business as production and
marketing. A business firm requires finance to commence its operations, to
continue operations and for expansion or growth. Finance is, therefore, an
important operative function of business.

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A large business firm has to raise funds from several sources and has to utilize
those funds in alternative investment opportunities. In order to ensure the
most judicious utilization of funds and to provide a reasonable rate of return
on the investment, sound financial policies and programmes are required.
Unwise financing can drive a business into bankruptcy just as easily as a poor
product, inept marketing or high production costs.

On the other hand, adequate and economical financing can provide the firm a
differential advantage in the market place. The success of a business
enterprise is largely determined by the way its capital funds are raised,
utilized and disbursed. In the modern money-using economy, the importance
of finance has increased further due to increasing scale of operations and
capital intensive techniques of production and distribution. In fact, finance is
the bright thread running through all business activity. It influences and limits
the activities of marketing, production, purchasing and personnel
management. The success of a business is measured largely in financial terms.
The efficient organization and administration of the finance function is thus
vital to the successful functioning of every business enterprise.

Meaning of Financial Management: Financial management may be defined
as planning, organizing, directing and controlling the financial activities of an
organization. According to Guthman and Dougal, financial management
means, “the activity concerned with the planning, raising, controlling and
administering of funds used in the business.” It is concerned with the
procurement and utilization of funds in the proper manner. Financial
activities deal with not only the procurement and utilization of funds but also
with the assessing of needs for funds, raising required finance, capital
budgeting, distribution of surplus, financial controls, etc.

Ezra Solomon has described the nature of financial management as follows:
“Financial management is properly viewed as an integral part of overall
management rather than as a staff specially concerned with funds raising
operations. In this broader view, the central issue of financial policy is the

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wise use of funds and the central process involved is a rational matching of
the advantage of potential uses against the cost of alternative potential
sources so as to achieve the broad financial goals which an enterprise sets for
itself. In addition to raising funds, financial management is directly concerned
with production, marketing and other functions within an enterprise
whenever decisions are made about the acquisition or distribution of funds.”

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Objectives of Financial Management


Financial management is one of the functional areas of business. Therefore, its
objectives must be consistent with the overall objectives of business. The
overall objective of financial management is to provide maximum return to
the owners on their investment in the long- term.

This is known as wealth maximization. Maximization of owners’ wealth is
possible when the capital invested initially increases over a period of time.
Wealth maximization means maximizing the market value of investment in
shares of the company.

The main objectives of financial management are: -
 Profit maximization: The main objective of financial management is
profit maximization. The finance manager tries to earn maximum

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profits for the company in the short-term and the long-term. He cannot
guarantee profits in the long term because of business uncertainties.
However, a company can earn maximum profits even in the long-term,
if: -
The Finance manager takes proper financial decisions.
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 wealth for the
shareholders. So, the finance manager tries to give a maximum dividend
to the shareholders. He also tries to increase the market value of the
shares. The market value of the shares is directly related to the
performance of the company. Better the performance, higher is the
market value of shares and vice-versa. So, the finance manager must try
to maximize shareholder's value.
 Proper estimation of total financial requirements: Proper estimation of
total financial requirements is a very important objective of financial
management. The finance manager must estimate the total financial
requirements of the company. He must find out how much finance is
required to start and run the company. He must find out the fixed
capital and working capital requirements of the company. His
estimation must be correct. If not, there will be shortage or surplus of
finance. Estimating the financial requirements is a very difficult job. The
finance manager must consider many factors, such as the type of
technology used by the company, number of employees employed, a
scale of operations, legal requirements, etc.
 Proper mobilization: Mobilization (collection) of finance is an important
objective of financial management. After estimating the financial
requirements, the finance manager must decide about the sources of
finance. He can collect finance from many sources such as shares,
debentures, bank loans, etc. There must be a proper balance between

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owned finance and borrowed finance. The company must borrow
money at a low rate of interest.
 Proper utilization of finance: Proper utilization of finance is an
important objective of financial management. The finance manager
must make optimum utilization of finance. He must use the finance
profitable. He must not waste the finance of the company. He must not
invest the company's finance in unprofitable projects. He must not block
the company's finance in inventories. He must have a short credit
period.
 Maintaining proper cash flow: Maintaining proper cash flow is a short-
term objective of financial management. The company must have a
proper cash flow to pay the day-to-day expenses such as a purchase of
raw materials, payment of wages and salaries, rent, electricity bills, etc.
If the company has a good cash flow, it can take advantage of many
opportunities such as getting cash discounts on purchases, large-scale
purchasing, giving credit to customers, etc. A healthy cash flow
improves the chances of survival and success of the company.
 Survival of company: Survival is the most important objective of
financial management. The company must survive in this competitive
business world. The finance manager must be very careful while making
financial decisions. One wrong decision can make the company sick, and
it will close down.
 Creating reserves: One of the objectives of financial management is to
create reserves. The company must not distribute the full profit as a
dividend to the shareholders. It must keep a part of it profit as reserves.
Reserves can be used for future growth and expansion. It can also be
used to face contingencies in the future.
 Proper coordination: Financial management must try to have proper
coordination between the finance department and other departments of
the company.
 Create goodwill: Financial management must try to create goodwill for
the company. It must improve the image and reputation of the company.

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Goodwill helps the company to survive in the short-term and succeed in
the long-term. It also helps the company during bad times.
 Increase efficiency: Financial management also tries to increase the
efficiency of all the departments of the company. Proper distribution of
finance to all the departments will increase the efficiency of the entire
company.
 Financial discipline: Financial management also tries to create a
financial discipline. Financial discipline means: -
To invest finance only in productive areas. This will bring high returns
(profits) to the company.
To avoid wastage and misuse of finance.
 Reduce cost of capital: Financial management tries to reduce the cost of
capital. That is, it tries to borrow money at a low rate of interest. The
finance manager must plan the capital structure in such a way that the
cost of capital is minimized.
 Reduce operating risks: Financial management also tries to reduce the
operating risks. There are many risks and uncertainties in a business.
The finance manager must take steps to reduce these risks. He must
avoid high-risk projects. He must also take proper insurance.
 Prepare capital structure: Financial management also prepares the
capital structure. It decides the ratio between owned finance and
borrowed finance. It brings a proper balance between the different
sources of. capital. This balance is necessary for liquidity, economy,
flexibility, and stability.
Wealth of shareholders = Number of shares held ×Market price per share.
In order to maximize wealth, financial management must achieve the
following specific objectives:
(a) To ensure availability of sufficient funds at reasonable cost (liquidity).

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(b) To ensure effective utilization of funds (financial control).
(c) To ensure safety of funds by creating reserves, re-investing profits, etc.
(minimization of risk).
(d) To ensure adequate return on investment (profitability).
(e) To generate and build-up surplus for expansion and growth (growth).
(f) To minimize cost of capital by developing a sound and economical
combination of corporate securities (economy).
(g) To coordinate the activities of the finance department with the activities of
other departments of 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 writers on finance believe
that it leads to efficient allocation of resources and optimum use of capital.

It is said that profit maximization is a simple and straightforward objective. It
also ensures the survival and growth of a business firm. But modern authors
on financial management have criticized the goal of profit maximization.
Ezra Solomon has raised the following objections against the profit
maximization objective:
Objections against the Profit Maximization Objectives:
(i) The concept is ambiguous or vague. It is amenable to different
interpretations, e.g., long run profits, short run profits, volume of 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 does not take into account the time value of money. The value of
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
prospective earnings stream. The streams of benefits may have varying
degrees of uncertainty. Two projects may have same total expected earnings
but if the earnings of one fluctuate less widely than those of the other it will be
less risky and more preferable. More uncertain or fluctuating the 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 maximizing earnings per
share which is not necessarily the same as maximizing market-price share.
According to Solomon, “to the extent payment of dividends can affect the
market price of “the stock (or share), the maximization of earnings per share
will not be a satisfactory objective by itself.”
(v) Profit maximization objective does not take into consideration the social
responsibilities of business. It ignores the interests of workers, consumers,
government and the public in general. The exclusive attention on profit
maximization may misguide managers to the point where they may endanger
the survival of the firm by ignoring research, executive development and
other intangible investments.
Wealth Maximization: Prof. Ezra Solomon has advocated wealth
maximization as the goal of financial decision-making. Wealth maximization

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or net present worth maximization is defined as follows: “The gross present
worth of a course of action is equal to the capitalized value of the flow of
future expected benefits, discounted (or as capitalized) at a rate which reflects
their certainty or uncertainty.

Wealth or net present worth is the difference between gross present worth
and the amount of capital investment required to achieve the benefits being
discussed. Any financial action which creates wealth or which has a net
present worth above zero is a desirable one and should be undertaken. Any
financial action which does not meet this test should be rejected. If two or
more desirable courses of action are mutually exclusive (i.e., if only one can be
undertaken), then the decision should be to do that which creates most wealth
or shows the greatest amount of net present worth. In short, the operating
objective for financial management is to maximize wealth or net present
worth.”

Wealth maximization is more operationally viable and valid criterion
because of the following reasons:
(a) It is a precise and unambiguous concept. The wealth maximization means
maximizing the market value of shares.
(b) It takes into account both the quantity and quality of the expected steam of
future benefits. Adjustments are made for risk (uncertainty of expected
returns) and timing (time value of money) by discounting the cash flows,
(c) As a decision criterion, wealth maximization involves a comparison of
value of cost. It is a long-term strategy emphasizing the use of resources to
yield economic values higher than joint values of inputs.

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(d) Wealth maximization is not in conflict with the other motives like
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 financial decisions should be
guided.
The above description reveals that wealth maximization is more useful if
objective than profit maximization. It views profits from the long-term
perspective. The true index of the value of a firm is the market price of its
shares as it reflects the influence of all such factors as earnings per share,
timing of earnings, risk involved, etc.
Thus, the wealth maximization objective implies that the objective of financial
management should be to maximize the market price of the company’s shares
in the long-term. It is a true indicator of the company’s progress and the
shareholder’s wealth.
However, “profit maximization can be part of a wealth maximization strategy.
Quite often the two objectives can be pursued simultaneously but the
maximization of profits should never be permitted to overshadow the broader
objectives of wealth maximization.

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Explanation of Nature and Scope of Financial Management

Financial management is one of the important aspects of finance. Nobody
can ever think to start a business or a company without financial knowledge
and management strategies. Finance links itself directly to several functional
departments like marketing, production, and personnel. Here we will list out
some of the major scopes of financial management notes which will help you
in your decision-making process.
Financial management has a wide scope. According to Dr. S. C. Saxena, the scope
of financial management includes the following five A's.
 Anticipation: Financial management estimates the financial needs of
the company. That is, it finds out how much finance is required by the
company.
 Acquisition: It collects finance for the company from different sources.

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 Allocation: It uses this collected finance to purchase fix and current
assets for the company.
 Appropriation: It divides the company's profits among the
shareholders, debenture holders, etc. It keeps a part of the profits as
reserves.
 Assessment: It also controls all the financial activities of the company.
Financial management is the most important functional area of
management. All other functional areas such as production
management, marketing management, personnel management, etc.
depend on Financial management. Efficient financial management is
required for survival, growth, and success of the company or firm.
Key Scope of Financial Management
The major scope of financial management is divided into four categories. Let's
learn and understand the nature and scope of financial management through
the below details notes.
Investment Decision: Evaluating the risk involve, measuring the cost of fund
and estimating expected benefits from a project comes under investment
decision. It is one of the important scopes of financial management. The two
major components of investment decision are Capital budgeting and liquidity.
Capital budgeting is commonly known as the investment appraisal. It deals
with the allocation of capital and funds in such a manner that they will yield
earnings in future. Capital budgeting determines the long-term investment
which includes replacement and renovation of old assets. It is all about
maintaining an appropriate balance between fix and current assets in order to
maximize profitability and to maintain desired liquidity in the firm for its
smooth functioning.
Working Capital Decision: Decisions related to working capital is another
crucial scope of financial management. Decisions involving around working
capital and short-term financing are known as a working capital decision. It
also manages the relationship between short-term assets and its liabilities.
Short-term assets include cash in hand, receivables, inventory, short-term
securities, etc. Creditors, bills payable, outstanding expenses, bank overdraft,
etc. are a firm’s short-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 plays a crucial role in today’s
corporate era. It determines the amount of taxation that stockholders pay. A
good dividend policy helps to achieve the objective of wealth maximization.
Distributing the entire profit in the form of dividends or distributing only a
certain percentage of it is decided by dividend policy. It is known as deciding
the optimum dividend payout ratio i.e. proportion of net profits to be paid out
to shareholders. Stability of cash dividends and stock sets the parameter
which determines the number of investment opportunities. Expansion of an
economic activity depends on the effectiveness of dividend decisions and
scope of financial management.
Financing Decision: Financing Decisions focuses on the accountabilities and
stockholders’ equity side of the firm’s balance sheet, for example, the decision
to issue bonds is a kind of financing decision. The main aim of financing
decision is to cover expenses and investments. The decision involves
generating capitals by various methods, from different sources, in relative
proportion and considering opportunity costs, with respect to time of
flotation of securities, etc.
The scope of financial management is to meet the expenses of the firm, a
suitable capital structure for the enterprise should develop by the finance
manager. Only an optimum finance mix can maximize the market price of the
company’s shares in the long run. To decrease the 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 market value per share is
maximized. The apt timing for raising funds is to decide by the financial
manager time to raise the funds.
Nature of Financial Management
Finance management is a long-term decision-making process which involves a
lot of planning, allocation of funds, discipline and much more. Let us

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understand the nature of financial management with reference to this
discipline.
 Finance management is one of the important education which has to
realize worldwide. Now a day’s people are undergoing through various
specialization courses of financial management. Many people have
chosen financial management as their profession.
 The nature of financial management is never a separate entity. Even as
an operational manager or functional manager one has to take
responsibility for financial management.
 Finance is a foundation of economic activities. The person who Manages
finance is called the financial manager. An important role of a financial
manager is to control finance and implement the plans. For any
company financial manager plays a crucial role in it. Many times it
happens that lack of skills or wrong decisions can lead to heavy losses to
an organization.
 Nature of financial management is multi-disciplinary. Financial
management depends upon various other factors like accounting,
banking, inflation, economy, etc. for the better utilization of finances.
 An approach to financial management is no limit to business functions
but it is a backbone of commerce, economic and industry.
Scope & Elements of Financial Management
 Investment decisions: Include investment in fixed assets (call as
capital budgeting). Investment in current assets is also a part of
investment decisions call for working capital decisions.
 Financial decisions: They relate to the raising of finance from various
resources which will depend upon the decision on the type of source,
the period of financing, cost of financing and the returns thereby.
 Dividend decision: The finance manager has to take a decision with
regards to the net profit distribution. Net profits are generally divided
into two: 1) The dividend for shareholders- Dividend and the rate of it
has to decide. 2) Retained profits- Amount of retained profits has to
finalize which will depend upon expansion and diversification plans of
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, Meaning and Objectives -
http://www.yourarticlelibrary.com/financial-
management/financial-management-its-definition-meaning-and-
objectives-discussed/27963