Basics of Financial Management – Part 4

The objective of financial management is to plan, program and execute the total financial activities including the financial operations carried on by a company from the time of its very inception, of its growth and expansion in a most economic and efficient manner to optimize profitability. It is to analyze the financial implications involved in the proportion of corporate enterprises. It assists in scanning the financial plans of new and established business units. It examines the nature, extent, and form of the capital required by business enterprises. It is to scrutinize the practices and policies of administering corporate income. It looks into the property of dividend, depreciation and reserve policies adopted by various business organizations.

The financial policy of a company is based on the above decisions. An objective is the criteria for action. It represents ends towards which not only planning but all other activities of the organization is directed. Objective provides a framework for optimum financial decision making. The ultimate financial objective of a company is to maximize the economic return for which two major criteria are profit maximization and wealth maximization. Now, profit of an organization can be maximized in various ways. It can be tried by increasing the return on investment ratio that is by increasing the output against a fixed quantum of input or by reducing the input resources against a fixed quantum of output. This is possible when the financial activities can be properly managed with optimum use of economic resources.

On the other hand, the wealth maximization, another major objective of financial management, is to maximize the value of the enterprise over a long run. It removes the limitations of the profit maximization. Under this method the net present value or wealth of a course of business operation is maximized. Value maximization decision recognizes the time value of money and, at the same time, tackles the risks of uncertainty.