OBJECTIVES OF FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT :
Financial management primarily concerns with the management of financial aspect of an enterprise. It deals with procurement of funds and their effective utilization in the business. Basic questions that are grappled with in financial management are: How much should the firms invest? What specific assets should the firms invest in? How should the cash required for investment be raised?

Objectives of financial management:

Following are the two widely discussed objectives of financing managementPROFIT MAXIMIZATION SHAREHOLDER WEALTH MAXIMIZATION

PROFIT MAXIMIZATION
Profit earning is the main aim of every economic activity . A business being an economic institution must earn profit to cover its costs and provide funds for growth . No business can survive without earning profit . Profit is a measure of efficiency of a business enterprise

Arguments in favour of profit maximization as the objective of business :

When profit-earning is the aim of business then profit maximization should be the obvious objective . Profitability is a barometer for measuring efficiency and economic prosperity of a business enterprise , thus, profit maximization is justified. Economic and business conditions do not remain same at all the times . There may be adverse business conditions like depression, severe competition, strikes, lock outs etc. A business will able to survive under unfavourable situation, only if it has some past earnings . Therefore, a business should try to earn more and more when the situation is favourable

Profits are the main sources of finance for the growth of a business, so a business should aim at maximization of profits for enabling its growth and development . Profitability is essential for fulfilling social goals also . A firm by pursuing the objectives of profit maximization also maximizes socio-economic welfare .

Criticism of Profit Maximisation

A firm pursuing the objective of profit maximization starts exploiting workers and the consumers. Hence, it is immoral and leads to a number of corrupt practices . The term Profit is vague and it cannot be precisely defined . It means different things for different people . Should we consider short-term profits or long term profits ?Does it mean total profits or earning per share ? Should we take profits before tax or after tax ?

Profit maximization objective ignores the time value of money and does not consider the magnitude and timing of earning . It ignores the fact that cash received today is more important than the same amount of cash received after some years . It does not take into consideration the risk of the prospective earnings stream .

Shareholder Wealth maximization: wealth

maximization means maximizing the net present value (NPV) or wealth of a course of action is the difference between the present value of its benefits and the present value of its costs.
NPV = C1 (1+K) + C2 + ------ + C n - Co (1+K)2 (1 + K)n

Where c1, c2 of action. K Co

Cash inflows in future course Discount rate Cash outflow

The wealth maximization principle implies that the fundamental objective of a firm is to maximize the market value of its shares. The value of the company shares is represented by their market price which in turn, is a reflection of the firms financial decisions.

A financial action that has a positive NPV creates wealth for shareholders and therefore is desirable . Between a number of projects the one with the highest NPV should be adopted. From the Shareholders point of view the wealth created by a company through its action is reflected in the market value of the company s shares . Therefore, the wealth maximization principle implies that the fundamental objective of a firm is to maximize the market value of its shares. The value of the company s shares is represented by their market price which, in turn, is a reflection of the firm s financial decisions .

ADVANTAGES OF SHAREHOLDERS WEALTH MAXIMIZATION

The objective of wealth maximization has a clear focus on shareholders interest . Market price of a stock is the most visible parameter which can be used to assess the performance of publicly traded firm . The market price of a stock is updated continuously reflecting the impact of new information coming out about the firm . Stock price is the most relevant measure of shareholders wealth since they can sale their stock and receive the market price at any time .

 Significance of Wealth- Maximization: The company although it cares more for the economic welfare of the shareholders, it cannot forget the others who directly or indirectly work for the overall development of the company. Thus WealthMaximization takes care of Lenders or creditors Workers or Employees Public or Society Management or Employer -other objective-ensuring fair return to shareholder, building up reserves for growth and expansion, ensuring financial discipline in the management.

CRITICISM OF SWM:
The objective is not descriptive of what the firms actually do. The objectives of wealth maximization is not necessarily socially desirable.

THANK U

SUBMITTED BY:

SUNANDA YADAV BEENA KUMARI