Objectives of Financial Management

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
In simple terms objective of Financial Management is to maximize the value of firm, however
it is much more complex than that. The management of the firm involves many stakeholders,
including owners, creditors, and various participants in the financial market. The same is shown
in below diagram:

The objectives of financial management are given below:

1. Profit maximization

Main aim of any kind of economic activity is earning profit. A business concern is also
functioning mainly for the purpose of earning profit. Profit is the measuring techniques to
understand the business efficiency of the concern.

The finance manager tries to earn maximum profits for the company in the short-term and the
long-term. He cannot guarantee profits in the long term because of business uncertainties.
However, a company can earn maximum profits even in the long-term, if:

 The Finance manager takes proper financial decisions

 He uses the finance of the company properly

2. Wealth maximization

Wealth maximization (shareholders’ value maximization) is also a main objective of financial

management. Wealth maximization means to earn maximum wealth for the shareholders. So,
the finance manager tries to give a maximum dividend to the shareholders. He also tries to
increase the market value of the shares. The market value of the shares is directly related to
the performance of the company. Better the performance, higher is the market value of shares
and vice-versa. So, the finance manager must try to maximize shareholder’s value

3. Proper estimation of total financial requirements

Proper estimation of total financial requirements is a very important objective of financial

management. The finance manager must estimate the total financial requirements of the
company. He must find out how much finance is required to start and run the company. He
must find out the fixed capital and working capital requirements of the company. His
estimation must be correct. If not, there will be shortage or surplus of finance. Estimating the
financial requirements is a very difficult job. The finance manager must consider many
factors, such as the type of technology used by company, number of employees employed,
scale of operations, legal requirements, etc.

4. Proper mobilization

Mobilization (collection) of finance is an important objective of financial management. After

estimating the financial requirements, the finance manager must decide about the sources of
finance. He can collect finance from many sources such as shares, debentures, bank loans,
etc. There must be a proper balance between owned finance and borrowed finance. The
company must borrow money at a low rate of interest.

5. Proper utilization of finance

Proper utilization of finance is an important objective of financial management. The finance

manager must make optimum utilization of finance. He must use the finance profitable. He
must not waste the finance of the company. He must not invest the company’s finance in
unprofitable projects. He must not block the company’s finance in inventories. He must have
a short credit period.

6. Maintaining proper cash flow

Maintaining proper cash flow is a short-term objective of financial management. The

company must have a proper cash flow to pay the day-to-day expenses such as purchase of
raw materials, payment of wages and salaries, rent, electricity bills, etc. If the company has a
good cash flow, it can take advantage of many opportunities such as getting cash discounts on
purchases, large-scale purchasing, giving credit to customers, etc. A healthy cash flow
improves the chances of survival and success of the company.

7. Survival of company

Survival is the most important objective of financial management. The company must survive
in this competitive business world. The finance manager must be very careful while making
financial decisions. One wrong decision can make the company sick, and it will close down.
8. Creating reserves

One of the objectives of financial management is to create reserves. The company must not
distribute the full profit as a dividend to the shareholders. It must keep a part of it profit as
reserves. Reserves can be used for future growth and expansion. It can also be used to face
contingencies in the future.

9. Proper coordination

Financial management must try to have proper coordination between the finance department
and other departments of the company.

10. Create goodwill

Financial management must try to create goodwill for the company. It must improve the
image and reputation of the company. Goodwill helps the company to survive in the short-
term and succeed in the long-term. It also helps the company during bad times.

11. Increase efficiency

Financial management also tries to increase the efficiency of all the departments of the
company. Proper distribution of finance to all the departments will increase the efficiency of
the entire company.

12. Financial discipline

Financial management also tries to create a financial discipline. Financial discipline means:

 To invest finance only in productive areas. This will bring high returns (profits) to the
company.
 To avoid wastage and misuse of finance.

13. Reduce cost of capital

Financial management tries to reduce the cost of capital. That is, it tries to borrow money at a
low rate of interest. The finance manager must plan the capital structure in such a way that
the cost of capital it minimized.

14. Reduce operating risks

Financial management also tries to reduce the operating risks. There are many risks and
uncertainties in a business. The finance manager must take steps to reduce these risks. He
must avoid high-risk projects. He must also take proper insurance.

15. Prepare capital structure

Financial management also prepares the capital structure. It decides the ratio between owned
finance and borrowed finance. It brings a proper balance between the different sources of
capital. This balance is necessary for liquidity, economy, flexibility and stability.
 Role and Scope of Financial Management

Role of Financial Management in Business

Money, money and money-it is the lifeblood of business and finance can be considered as the
nerve center of business. It is no doubt the organization’s financial management creates an
indelible mark to determine the ultimate success of the business. The soaring demand for finance
professionals has given rise to a whole host of online courses in finance and various
certifications.

For ages now, finance has enjoyed its primary role in the general management of the
organization and here are the key roles of financial management:

1. Accounting and Bookkeeping

It is very important to measure, identify and record all the financial information of the
organization. What goes in, what comes out? Financial management comprises of an effective
accounting system that provides the overall financial picture of the organization. On the other
hand, there is bookkeeping that records the day-to-day transaction of the business and lies at the
foundation of the accounting system.

2. Reporting
There are several stakeholders that rely on the company’s financial report to make key decisions.
For example, shareholders of the business are shared with frequent reports of the financial
progress of the business. So, are the stockholders who rely on reports of data forecasting and
budgeting when determining to buy and sell. In all cases, accurate data from the financial report
is very important to make key decisions

3. Payables and Receivables

Managing the cash flow of business – what you owe to your suppliers and what do your
customers owe you? It is important to maintain a clear track record of this so that you can stay
liquid with the right amount of cash on hand at all times.

4. Investment Opportunities
Finance gives you the power to invest in the right opportunities at the right time. Only by
considering the financial health of the business and determining its ability to invest, the company
can leverage on the right opportunities. Whether you want to invest in an acquisition or new
product, it is critical to carefully inspect the different aspects of financial management of the
business to make a decision.

5. Risk
Minimal risk with maximum profit is the goal of any business. A healthy financial management
system is a prerequisite to minimize unforeseen risks and counteract liabilities. An effective
finance system should include adequate insurance for important elements of the organization,
budgeting for working capital, controlling debt and maximizing operational flexibility if the
business experiences cash flow problems.

Finance is the backbone of any business. Without accurate and timely information from the
financial management system, the business is bound to fall to pieces. Ensure the growth of your
business by equipping yourself with finance analytics certification and move towards success.
Scope of Financial Management

The Scope of Financial Management Notes includes various points like:

1. Financial Planning
2. Securing Capital Funds
3. Financial Supervision
4. Financial Control
5. Financial Decisions
6. Preparation of Annual Financial Statements
7. Estimation of Financial Performance
8. Evaluating the Impact of New Financing
9. Miscellaneous Functions
1. Financial Planning
This is the primary scope of financial management and it means planning is the process of
determining the objectives, goals, and ideas for the business in previously (Thinking in
advance). It is also the estimation of identifying the goals, initial policies, and programmed to
achieve the predetermined goals. Financial Planning includes various points like:
 Deciding Financial Objectives
Deciding the financial objective is the major factor to determine the basic goals of profit and
wealth maximization.

 Establishment of Policies and Procedures

Policies and Procedures are the main character to define the code of conduct of any enterprise
or business i.e., Policies indicates the guidelines and procedures formulates the rules and
regulations of the whole company.

 Arrangement of Financial Plan

In this, financial plan helps to prepare the planning strategy and design a suitable format of
capital structure, which includes:

1. It helps to estimate the size of the capital structure,

2. It helps to design the capital structure with various sources of funds. Those sources of
funds may be owned or borrowed.
3. Accommodate in the process of financial planning for future development and helps to
keep pace with the innovative or technological changes.
2. Securing Capital Funds|
This is the secondary scope of financial management and it means when the quantum of the
capital structure has been designed, and after that, the next step is to arrange the necessary
funds from various sources like individuals and various institutions.
In this function, capital is the biggest source for running a specific business because it
arranges the selling and marketing concepts of corporate business.
 3. Financial Supervision
This is the third scope of financial management and it means to supervise the collection of
funds for doing a proper job. Once the source of capital will be carefully selected and the
funds of capital have been received, then after, the company or organization work for the
welfare of the particular company. It includes various steps for defining
the supervision aspects:
 Establish Effective Assets Management
It helps to establish a proper fixed assets management and formulating the new capital-
budgeting techniques. Once the assets are properly established, then the responsibility of the
company is to utilize fixed assets in a proper manner and do proper maintenance with the
production department.

 Maintaining Optimum Level of Liquidity

In every organization, the finance department always keep our eye constant for watching a
cash-in-flows and cash-outflows for assuming and determining the “Surplus-Cash“ and
“Deficit Cash” and make the proper arrangements for reducing the overflows and underflows
and make try to maintain the optimum level of liquidity or cash.

4. Financial Control
This is a fourth scope of financial management which includes proper utilization of
investment in miscellaneous assets like manpower. Financial control is formulated through a
budgetary control system through which the actual cost of the company will be kept within
limits and targeted profits earned by the company. It includes various process like:
1. It helps to fix the standards of the company in advance,
2. It helps to build the sustained comparison between actual cost and pre-determined
standards,
3. It helps to outline the remedial action,
4. It helps to establish the follow-up system,
5. It helps to modify the standards and norms.
5. Financial Decisions
This is the fifth scope of financial management and it means to taking financial decisions are
very helpful to maximize the growth and potential of the business. It includes various types
like-
(i) Investment Decisions
(ii) Financing Decisions
(iii) Dividend Decisions.
 Investment Decisions
The investment decisions are the part of the financial decisions made by the investors and
top-level management for the purpose of establishing the investment opportunities.
 Financing Decisions
The financial decision is also the main decision which is made by the financial manager
related to the financial-mix of the company. It is formulated with the allocation of funds and
borrowing for investment decisions.
 Dividend Decisions
The dividend decision is also the main decision which is taken by the financial manager for
distributing the dividend in the group of shareholders. Thus, the dividend is also known as the
profit of the company.

6. Preparation of Annual Financial Statements

This is the sixth scope of financial management and it means, financial statements include
Profit & Loss A/C and Balance Sheet. These two main aspects are shows the financial
reputation or condition of the company during a working period usually a financial year. It
shows the income and expenditure of the company also.
Financial Statements are designed by always keeps finance manager and its started from 1st
April to 31st March (1 Year).

7. Estimation of Financial Performance

This is the seventh scope of financial management and it means an annually and time-to-time
evaluation of performance is the very crucial task for financial management and financial
manager. For doing the evaluation, there are various turnover variables like ratio analysis,
trend analysis, net profit, cost per unit, and Return on Investment plays a very crucial role to
judge the performance of a firm of past and current years.

8. Evaluating the Impact of New Financing

This is the eighth scope of financial management and it means, nature of modern management
is becoming future-oriented and follow the objectivity. In this case, time-to-time growth and
development are very important for doing a specific business because it helps the business to
build a huge empire.
Now it’s the turn of finance, in this function finance plays an essential role to make a successful
business for the purpose of development and growth.

9. Miscellaneous Functions
This is the ninth scope of financial management and it means, the finance area is a very broad
concept and it includes a bulk amount of scope or functions for determining the financial
management. The number of functions includes tax-planning, management of the provident
fund, gratuity, safety of securities, social insurance funds and so on.