Main Goal/Objectives of Financial Management:
The main goal/objectives of financial management is to manage the financial resources of an organization in such a way to achieve its objectives. These goals may vary from organization to organization, but generally the following key goals are emphasized:
Profit maximization: Increasing the profit of the organization is one of the main goal/objectives of financial management. To achieve this, it is important to make profit through proper investment and reduce wastage.
Example 01:
If a manufacturing firm calculates its production costs accurately and minimizes waste wherever it exists, the firm will be able to achieve higher profits with lower costs. This will result in an increase in the rate of profit, which will also be beneficial to the shareholders of the organization.
Wealth maximization: Wealth maximization is the process of increasing the income and wealth of the shareholders by increasing the profits of the organization. It is the main objective of an organization, where financial stability and long-term growth of the organization is ensured through proper management of business activities and investments.
Example 02:
A mobile phone manufacturing company is able to increase profits by reducing production costs, increasing sales and investing in new technologies. This results in an increase in the firm’s assets and also increases the shareholder’s income, which is an example of wealth maximization.
Collection and Utilization of Funds: Funds are required for the functioning of the organization. Proper collection of funds and planning of its proper utilization is an important responsibility of financial management. Institutions raise funds through their own funds as well as bank loans, share issues, or bonds.
Example 03:
Suppose, a new startup business needs funds to expand them. They issue shares in the market or raise funds from investors. If they can properly expand their business with properly raised funds, they can quickly move towards success.
Reduction of Financial Risk: Financial risk is an important factor in any organization. Volatility of earnings, inflation, interest rate changes, and market competition can increase risk. A major role of financial management is to minimize this risk.
Example 04:
If an export-oriented firm faces losses due to currency rate fluctuations, they can mitigate that risk through forward contracts. This allows them to exchange currencies at fixed rates in advance, thereby guaranteeing profits.
Importance of Financial Management:
Long term stability:
Proper financial planning ensures the long-term stability of the organization. By proper management of funds, proper direction of investment and reduction of risk, the organization achieves long-term success.
Advanced Business Plan:
Proper financial management of the organization helps in giving proper direction to the business. This creates new investment opportunities and business expansion.
Surviving in a competitive market:
A firm can stay ahead of its competitors through proper financial management. It strengthens the organization’s position in the competitive market by reducing costs, increasing profits and increasing resource utilization efficiency.
Example 05:
If an e-commerce company is able to reduce its delivery costs through proper financial planning and management, it can sell products at lower prices than its competitors. This will increase their sales rate and strengthen their position in the market.
Visit AICPA-CIMA site for study option.
More Resources
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