Financial management can be defined as managing the financial resources of a business by applying extensive management principles by organising, planning, controlling and directing the financial operations to manage the funds of a company. Thus, financial management is primarily concerned with increasing the funds and utilisation of an organisation and helping achieve its goals.
What is the main objective of Financial Management?
The main objective of financial management has to be harmonious with the businesses overall goals by maximising the owners’ welfare and ensuring maximum return on investments.
In plain terms, the objectives would be to increase a business’s value and maximise sustainability and profits
But increasing the profits and value is not even scratching the surface of what precisely the objective of Financial Management is. The ultimate goal of a financial manager is to utilise the finances of the business by planning an effective procurement of finance as there are many creditors, stakeholders, owners and other participants in the financial marketing world.
Financial Management has various objectives. However, to maximise the owners’ welfare, there are two primary objectives of Financial Management.
Namely, Profit maximisation and wealth maximisation.
1. Profit Maximisation
The process of profit maximisation is to increase the value of a business to its maximum capacity. Maximising the overall company’s profits will ensure that the company can invest more in equipment and innovative product development, which provide a return on investment and enhance the growth of the business.
Therefore, the first objective of Financial Management is to make informed and proper decisions to achieve maximum profits.
2. Wealth Maximisation
Wealth maximisation is a more modern approach compared to profit maximisation.
Financial Managers focus on maximising the wealth of the business shareholders shares as the companies shareholders invested their money into the business. Therefore, the financial manager’s responsibility is to ensure that the shareholders’ value increases and maximises.
This objective is based on cash flow and not as much on profits.
A company’s cash flows are more precise and accurate than profits, thus leaving no range for any uncertainty.
As an objective of financial management, Wealth maximisation permits the shareholders to accomplish their goals. Therefore, wealth maximisation reigns superior to the profit maximisation objective.
As disclosed earlier,
Financial Management has other vital objectives as well, such as:
Keep the competitiveness and survival of the company
It is vital to hire a professional and knowledgeable financial management company that can make sound and stable short-term and long-term decisions as the financial decisions made can define the failure or success of an organisation.
The ability for a business to remain competitive and grow lies in proper financial management strategies
Estimation of overall financial requirements
An essential objective of financial management is to make a thorough estimation of the overall financial requirements of a business. The financial manager must uncover the working and fixed capital of a business and estimate the number of finances required to operate the company.
The financial manager must take into account many factors such as the technology and software used by the business, the company’s legal requirements, the order of operations, and the number of employed workers. Should the estimation be incorrect, the business might run at a loss and risk a shortage or excess of finances.
Financial management requires the formulation of plans and budgets for the business to enhance its performance.
Therefore, financial managers build strategies regarding the economic actions and resources in a business by accumulating data from various sources regarding other organisations.
After that, the data collected is analysed to determine the shortages of the company.
Financial management also includes sourcing for financial resources to fund various projects and business operations.
Thus, financial managers must mobilise financial resources, legal and trusted sources such as debentures and banks. These recourses will add to the working capital of the business.
It is the financial managers’ responsibility to ensure an adequate balance between debt financing and equity financing.
The Creation of Interdependency and Coordination
There are various departments in a company. However, the finance department is the fuel that keeps the whole business engine running. Therefore, for the business operation to run smoothly and efficiently, there should be a mutual understanding and cooperation between all departments and the financial department.
All departments are tasked to prepare a budget estimate for six months or a year (12 months). After that, all proposals are sent to the finance department so that the financial managers can coordinate with the departments’ managers, executives and key decision-makers to allocate the financial resources respectively.