Objectives of financial Management

A finance manager must have a well defined objective in the light of which he has to take various decisions. The objective of the finance manager is required to be well defined because the evaluation of opportunities faced by him and the decisions that are taken depend a great deal on the objective of the financial management.

All the decisions of the finance manager will then be made in pursuit of that objective.

The following two are often considered as the objectives of the financial management:

1. The maximization of the profit of the firm

2. The maximization of the shareholders wealth

Maximization Of The Profits Of The Firm

For any business firm, the maximization of the profits of often considered as the implied objective.

Out

of

different

mutually

exclusive

options only that one should be selected which will result in maximum increase in profit.

This profit can be measured in terms of the total accounting profit available to the shareholders.

There are various problems with the profit maximization as the objective of financial management. Some of these are as follows:

It ignores the risk.

It concentrates on the profitability only and ignores the financing aspect of that decision. (Ex: Borrow beyond capacity).

It ignores the time value of money.

The profit maximization as an objective is vague and ambiguous(Ex:Short term or long term, PBT or PAT)

On the basis of above points it may be concluded that the profit maximization fails to be an operationally management. feasible objective of financial

Maximization of Shareholder Wealth

This objective is generally expressed in

term of maximization of the value of the share of the firm.

The value or the economic value of the firm is defined as the present value of the future cash flows generated by a decision, discounted at appropriate rate of discount which reflects the degree of risk associated with it.

Measure of wealth considers cash flows rather than the profits of the company.

The present values of the future cash flows are in the form of DIVIDENDS and other benefits expected from the firm. The

MARKET PRICE of the share reflects this present value.

Therefore,

the

economic

value

of

the

shareholders wealth is the market price of the share.

So all the financial decisions will be taken in such a way that the shareholder receive

highest combination of dividends and the increase in the market price of the share.

This objective makes the interest of the

shareholders compatible with that of the management.

It not only focuses on the short term

profits but also considers the long term perspective.

It considers the time value of money.

It considers the risk involved in taking all the three decisions i.e. financing decision,

investment decision and dividend decision.

In operational terms it is practical and

easily observed measure.

Comparison of Profit Maximization & Wealth Maximization Objective

Properties Profit Max. Return Risk Time Value Clarity Relationship Less With Management Compatible

Wealth Max. More Compatible