Financial Management Meaning and Objectives

Financial management is defined as the management of flow of funds in a firm and it deals with financial decision making of the firm. Financial management includes any decision made by an investor that affects his finances. In financial management the emphasis is laid on optimum utilization of funds. Financial management is important to all levels of human existence as every entity has to look after its finances. Financial management is also referred as planning, organizing and controlling the monetary resources of an organization. Financial management helps in improving the allocations of working capital within business operations. It reviews the financial health of the company by using tools like ratio analysis.

Goals / Objectives of Financial Management

A goal of the firm is the target against which a firm’s operating performance is measured. The goals serve as the point of reference to a decision maker. The objectives or goals of financial management are:
1. Profit Maximization.
2. Wealth Maximization.
3. Return Maximization.

1. Profit Maximization: The objective of financial management is to earn maximum profits. Various important decisions are taken to maximize the profit of the firm. Profit maximization as an objective of financial management results in efficient allocation of resources. Companies collect their finance by issuing shares to the public. Investors also purchase shares in hope of getting good returns from the company in the form of dividend. If the company does not earn good profits and fails to distribute higher dividends, the people would not invest in such a company and people who have already invested will sell their stock.

2. Wealth Maximization: The objective of wealth maximization of shareholders considers all future cash flows, dividends, earning per share, risk of a decision, etc. This goal directly affects the policy decision of the firm about what to invest in and how to finance these investments. Shareholders are always interested in maximization of wealth which depends upon the market price of the shares. Increase in market price lead to appreciation in shareholder’s wealth and vice versa. So the major goal of financial management is to maximize the market price of the equity shares of the company.

3. Return Maximization: The third objective of financial management says to safeguard the economic interest of all the persons who are directly or indirectly connected with the company – whether they are shareholders, creditors or employees. All these parties must also get maximum return on the investment and this can be possible only when the company earns higher profits to discharge its obligations to them.