Objective of Financial Management
The process of decision-making by finance managers must
be goal-oriented. The goal orientation of the finance
manager must be well defined because the evaluation of
the opportunities faced by him and the decisions that are
taken depend to a great extent on the goal of the finance
manager.
Thus, a good objective of financial management should
have the following characteristics:
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• It should be clear and unambiguous.
• It comes with a clear and timely measure that can
be used to evaluate the success or failure of a
decision.
• It should be consistent with the long-term
existence of the firm.
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A clear understanding of the objective of financial
management is a pre-requisite as the objectives provide a
framework for optimal financial decision-making.
The overall goal of any firm will not serve the purpose,
but rather an operationally useful criteria is required,
which helps in choosing the best out of several exclusive
opportunities in the given circumstances based on
available data.
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Several goals of financial management have been cited, Eg:
the Maximization of sales revenue, net profit, return on
investment, size of firm, percentage of market share, etc.
The problem is to identify one out of these several goals
which will give the best reflection of the effect of the
decision-making on shareholders’ interest.
Accordingly, the following two are considered as the
objectives of financial management:
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1. Maximization of Profits of the firms.
2. Maximization of shareholders’ wealth.
The critical evaluation of these objectives are
discussed below:
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Maximization of the Profits of the Firms: For any
business firm, maximization of profits is often considered
as the implied objective and therefore it is natural to
retain the maximization of profit as the goal of financial
management also. Various financial decisions are taken to
maximize the profits of the firm. These profits can be
measured in terms of total accounting profits available to
the shareholders.
Some arguments in favour of Profit maximization as the objective of
financial management are:
• The profit is regarded as a yardstick for the economic
efficiency of any firm.
• If all business firms of the society works are working
towards profit maximization, then the economic resources
of the society as a whole would be most efficiently,
economically, and profitably used.
• The profit maximization by one firm, if targeted by all, will
ensure maximization of the welfare of the society.
Various problems associated with profit maximization as the
objective of financial management are:
• The profit maximization overlooks the interest of other
parties than shareholders.
• The profit maximization concentrates on profitability
only and ignores the financing aspect of that decision
and the risk associated with it.
• It ignores the timings of costs and returns and thereby
ignores the time value of money.
• The profit maximization as an objective is vague and
ambiguous.
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Profit maximization borrows the concept of profit from the
field of accounting and thus tends to concentrate on the
immediate effect.
So, profit maximization fails to be an operationally feasible
objective of financial management. A goal as already
stated should be precise, well defined and must be capable
of taking cognizance of all possible costs and benefits of all
the alternatives being evaluated. One such goal is termed
the maximization of shareholders’ wealth.
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Maximization of shareholders’ Wealth: In the theory of
Financial Management, it is well accepted that the objective
of financial management is maximization of shareholders’
wealth. This objective is generally expressed in terms of the
maximization of the value of a share of a firm.
The shareholders’ wealth is represented by the present value
of all the future cash flows in the form of dividends or other
benefits expected from the firm. The market price of the
share reflects this value.