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Objectives of Financial Management

Proper Estimation Of Total Financial Requirements


Profit Proper Mobilisation Of Finance
Maximization
Proper Utilisation Of Finance
Objectives of Maintaining Proper Cash Flow
Wealth
Financial
Maximization Survival Of Company
Management
Creating Reserves
Other
Objectives
Proper Coordination
Create Goodwill
Increase Efficiency
Financial Discipline
Reduce Cost Of Capital
Reduce Operating Risks
Prepare Capital Structure

Profit Maximization
 Profit = Earnings after Taxes (EAT) - measure of a company's net profitability.
Calculated by Revenues of the Business minus All Expenses And Income Taxes
 Traditional approach
 Primary objective of financial management
 All the decisions relating to business are focused and evaluated on maximizing the profits
to optimum levels.
 Also called as “cashing per share maximization”

Favorable Arguments for Profit Unfavourable Arguments for Profit


Maximization Maximization
1. Main aim is earning profit.
2. Profit is the parameter of the business
1. Leads to exploiting workers and
operation.
consumers
3. Profit reduces risk of the business
2. Creates immoral practices
concern.
3. Leads to inequalities among the stake
4. Profit is the main source of finance.
holders
5. Profitability meets the social needs
also.

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Drawbacks of Profit Maximization
1. It is vague - profit is not defined precisely or correctly
2. It ignores the time value of money – Ignores net present value of the cash inflow
3. It ignores risk - does not consider risk of the business
4. It ignores quality - it ignores the intangible benefits such as quality, image

Wealth Maximization
 Modern approaches & a universally accepted concept
 Wealth means Shareholder Wealth
 Also known as ‘Value Maximization’ or ‘Net Present worth Maximization’
 It refers maximizing Earnings per share (EPS)
 EPS = Earnings after taxes (EAT) divided by the number of common shares outstanding

Favorable Arguments for Wealth Unfavourable Arguments for Wealth


Maximization Maximization
1. Main aim is to improve the value or
wealth of 1. leads to narrow idea of the business
2. the shareholders 2. it is also profit maximization
3. provides extract value of the business 3. creates ownership-management
concern controversy
4. considers both time and risk of the 4. Management alone enjoy certain
business benefits
5. provides efficient allocation of 5. Wealth maximization can be activated
resources only with the help of the profitable
6. ensures the economic interest of the position
society

Functions of a Financial Management / Role of Financial Manager in


Financial Management

1. Estimating the Amount of Capital Required


2. Determining Capital Structure
3. Choice of Sources of Funds
4. Procurement of Funds
5. Utilization of Funds
6. Disposal of Profits or Surplus
7. Management of Cash
8. Financial Control
9. Investment decisions

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Importance of Financial Management
1. Financial Planning
2. Acquisition of Funds
3. Proper Use of Funds
4. Financial Decision
5. Improve Profitability
6. Increase the Value of the Firm
7. Promoting Savings