Financial Management Objectives

Financial management objectives consist of the following:1. Financial management

- Is the way the management deals with the finances of an organization in
order to achieve the financial objectives of the organization
- The primary objectives for the private sector company are maximization of
shareholders wealth.
2. Financial control
- Is the planning to ensure that enough funding is available at the right time to
meet the need of the organization for short-term, medium-term or long term
capital.
- Short term e.g. working capital requirements, and medium and long term e.g.
purchases of non-current assets
3. Financial control
- Financial manager compare data on actual performance with forecast
performance, to ensure that they have finance project as forecasted and the
level of finance is up to standard.
Decisions must be taken in three key areas:
Investment To operate, all business will need finance and part of the financial
manager's role is to ensure this finance is used efficiently and effectively to ensure
the organizations objectives are achieved.
Finance Before a business can invest in anything, it needs to have some finance.
A key financial management decision is the identification of the most appropriate
sources (be it long or short term), taking into account the requirements of the
company, the likely demands of the investors and the amounts likely to be made
available.
Dividends The decision on the level of dividends to be paid can affect the value
of the business as a whole as well the ability of the business to raise further finance
in the future.
Difference between financial management, management accounting and financial
accounting.
Financial management
-

Is concerned with the long term raising of finance and the allocation and
control of resources
It involves targets, or objectives, that are generally long term by nature.

Management accounting
-

Is concerned with providing information for the more day to day functions of
control and decision making.
Involve budgeting, cost accounting, variance analysis, and evaluation of
alternative uses of short term resources.

Financial accounting

Financial Management Objectives

-

It is concerned with providing information about the historical results of past

plans and decisions.
Its purpose is to keep the owners (shareholders) and other interested parties
informed of the overall financial position of the business.

Other responsibilities of the financial manager:

Ensuring that debts are collected

Inventory level are kept at the minimum level
Cash balance are invested appropriately
Payables are paid on a timely basis
Hedging foreign currency transactions
Hedging interest rate exposure

Corporate strategy is concerned with the overall purpose and scope of the
organisation and how value will be added to the different parts (business units) of
the organisation.
Corporate objectives are those which are concerned with the firm as a whole.
Objectives should be explicit, quantifiable and capable of being achieved. The
corporate objectives outline the expectations of the firm and the strategic planning
process is concerned with the means of achieving the objectives.
Objectives should relate to the key factors for business success, which are
typically as follows.
Profitability (return on investment)
Market share
Growth
Cash flow
Customer satisfaction
The quality of the firm's products
Industrial relations
Added value
Financial targets may include targets for: earnings; earnings per share;
dividend per share; gearing level; profit retention; operating profitability.
The usual assumption in financial management for the private sector is that the
primary financial objective of the company is to maximise shareholders' wealth.
Financial objectives

Financial Management Objectives

A distinction must be made between maximising and satisficing:

Maximising seeking the maximum level of returns, even though this might
involve exposure to risk and much higher management workloads.
Satisficing finding a merely adequate outcome, holding returns at a
satisfactory level, avoiding risky ventures and reducing workloads.

Non-financial objectives
A company may have important non-financial objectives which must be satisfied
in order to ensure the continuing participation of all stakeholders. Examples of nonfinancial objectives are as follows.
(a) The welfare of employees
A company might try to provide good wages and salaries, comfortable and safe
working conditions, good training and career development, and good pensions. If
redundancies are necessary, many companies will provide generous redundancy
payments.
(b) The welfare of management
Managers will often take decisions to improve their own circumstances, even though
their decisions will incur expenditure and so reduce profits.
(c) The provision of a service
The major objectives of some companies will include fulfilment of a responsibility to
provide a service to the public. Examples are the privatised British Telecom and
British Gas.
(d) The fulfilment of responsibilities towards customers
Responsibilities towards customers include providing in good time a product or
service of a quality that customers expect, and dealing honestly and fairly with
customers.
(e) The fulfilment of responsibilities towards suppliers
Responsibilities towards suppliers are expressed mainly in terms of trading
relationships.
(f) The welfare of society as a whole
The management of some companies are aware of the role that their company has
to play inexercising corporate social responsibility. This includes compliance with
applicable laws and regulations but is wider than that. Companies may be aware of
their responsibility to minimize pollution. Companies also may consider their

Financial Management Objectives

'positive' responsibilities, for example to make a contribution to the community by
local sponsorship.

List of stakeholders

Agency relationship
A description of the relationship between management and shareholders expressing
the idea that managers act as agents for the shareholder, using delegated powers
to run the company in the shareholders' best interests.
Reason for agency problem to arise.
1.
2.
3.
-

A difference of objectives
The goals of the manager might differ from that of the shareholders.
Asymmetry of information
Shareholders are not exposed to all the information as the managers are.
Managers do not provide all the information the shareholders
Divorce of ownership and control
The business entity concept should be applied

Ways to resolve agency problem

Financial Management Objectives

1. Provide performance related pay element in the remuneration package of
managers
2. Follow the stock exchange regulations if being listed on the stock exchange
3. Corporate governance structures that minimize the problem caused by the
separation of ownership and control.
4. An executive share option scheme (ESOP)

Stock Exchange
A stock exchange employs rules and regulations to ensure that the stock market
operates fairly and efficiently for all parties involved.
A stock exchange is an organisation that provides a marketplace in which to trade
shares. It also sets rules and regulations to ensure that the stock market operates
both efficiently and fairly for all parties involved.
The stock exchange operates as two different markets.
o It is a market for issuers who wish to raise equity capital by offering shares
for sale to investors (a primary market). Such companies are listed on the
stock exchange.
o It is also a market for investors who can buy and sell shares at any time,
without directly affecting the entities in which they are buying the shares (a
secondary market).
To be listed on a stock exchange, a stock must meet the listing requirements laid
down in the listing rules in its approval process.
Corporate governance
Corporate governance is the system by which organisations are directed and
controlled.

Good corporate governance involves ensuring the effectiveness of risk

management and internal control, accountability to shareholders and other
stakeholders, and conducting business in an ethical and effective way.

There are a number of key elements in corporate governance.

(a) The management and reduction of risk is a fundamental issue in all
definitions of good governance, whether explicitly stated or merely implied.
(b) The notion that overall performance is enhanced by good organisational
structures and management practice within set best practice guidelines
underpins most definitions.
(c) Good governance provides a framework for an organisation to pursue its
strategy in an ethical and effective way from the perspective of all stakeholder
groups affected, and offers safeguards against misuse of resources, physical or
intellectual.
(d) Good governance is not just about externally established codes but also requires
a willingness to apply the spirit as well as the letter of the law.

Financial Management Objectives

(e) Accountability is generally a major theme in all governance frameworks.
Corporate governance codes of good practice generally cover the following areas.
(a) The board should be responsible for taking major policy and strategic
decisions.
(b) Directors should have a mix of skills and their performance should be
assessed regularly.
(c) Appointments should be conducted by formal procedures administered by a
nomination committee.
(d) Division of responsibilities at the head of an organisation is most simply
achieved by separating the roles of chairman and chief executive.
(e) Independent non-executive directors have a key role in governance. Their
number and status should mean that their views carry significant weight.
(f) Directors' remuneration should be set by a remuneration committee
consisting of independent non-executive directors.
(g) Remuneration should be dependent on organisation and individual
performance.
(h) Accounts should disclose remuneration policy and (in detail) the packages of
individual directors.
Non-For profit organization
Not for profit and public sector organisations have their own objectives, generally
concerned with achieving specified objectives effectively and efficiently.
Here are some possible objectives for a NFP organisation.
(a) Surplus maximisation (equivalent to profit maximisation eg a charity shop)
(b) Revenue maximisation (as for a commercial business eg a charity shop)
(c) Usage maximisation (for example, leisure centre swimming pool usage)
(d) Usage targeting (matching the capacity available, for example, in a governmentfunded hospital)
(e) Full/partial cost recovery (minimising subsidy)
(f) Budget maximisation (maximising what is offered)
(g) Producer satisfaction maximisation (satisfying the wants of staff and volunteers)
(h) Client satisfaction maximisation (the police generating the support of the public)
Value for money
Can be defined as getting the best possible combination of services from the least
resources, which means maximising the benefits for the lowest possible cost.
Effectiveness is the extent to which declared objectives/goals are met.
Efficiency is the relationship between inputs and outputs.
Economy is attaining the appropriate quantity and quality of inputs at the lowest
cost to achieve a certain level of outputs.
Example: Economy, efficiency, effectiveness

Financial Management Objectives

(a) Economy. This dimension relates to the cost of inputs. Economy within a school
could be measured, for example, by comparing average salaries per teacher with
earlier years and budgets.
(b) Efficiency. The efficiency with which a school's IT laboratory is used might be
measured in terms of the proportion of the school week for which it is used.
(c) Effectiveness. The effectiveness of a school's objective to produce quality
teaching could be measured by the proportion of students going on to higher or
further education.