Major goals of Financial Management
Financial management refers to the efficient and effective management of money in such a manner to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. It includes how to raise the capital and how to allocate capital. It also deals with the dividend policies of the shareholders.
Regarding the objectives of the business organization goal of a firm. There are two widely expected approaches –
- Profit maximization.
- Wealth Maximization.
(1) Profit maximization: Profit = Total revenue – Total expense. The maximization of the firm’s net income is called profit maximization.
According to this approach action that increases profit should be undertaken and those that decrease profits are to be avoided. In specific operational terms as applicable to financial management, the profit maximization criterion implies that the investment financing and dividend policy decisions of a firm should be oriented to the maximization of profits.
Rational of rout maximization:
- Profit is the yardstick of measure efficiency.
- Proper utilization of the resource.
- Social welfare.
(2) Wealth maximization: The primary goal of financial management is shareholder wealth maximization, which translates into maximizing the price of the firm’s common stock. This is also known as value maximization or net present worth maximization.
Shareholder wealth maximization means maximizing the net present value of a course of action to shareholders. The net present value of a course of action is the difference between the present value of its benefits and the present value of its cost. Nowadays value maximization is almost universally accepted as an appropriate operational decision criterion for financial management decision.
Rational of wealth maximization:
- Clear concept.
- Consideration the time value of money.
- Both quantitative and qualitative consideration.
- Emphasis on the increase in the share price.