Objectives of Financial Management
They can be classified into two heads:
1. Basic Objectives
2. Other Objectives
- Traditionally they are Maintenance of liquid assets
- Maximization of profitability of the firm
- Shareholders wealth maximization rather than profit maximization.
Maintenance of liquid assets:FM aims at maintenance of adequate liquid assets with the firm. The finance manager has to maintain a balance between liquidity and profitability.
Maximization of Profit: Profit maximization is a term which denotes profit to be earned by the organization in a given time period. The term profit can be used in two senses once is the owner oriented concept and other as the operational concept. Profit in the owner oriented concept refers to the amount of net profit which goes in the form of dividend to the shareholders.Profit in the operational concept means profitability which is an indicator of economic efficiency of the enterprise.
Some of the demerits of Profit maximization are
1.Time factor ignored
2.It Is Vague
3.It ignores time value and risk factor.
The above demerits have led to the saying that profit maximization has changed to shareholders wealth maximization
Wealth Maximization: Wealth Maximization is also called Value Maximization The wealth or net present worth of course of action is the difference between gross present worth and the amount of capital investment required to achieve the benefits. Gross present worth represents the present value of expected cash benefits..In simple Wealth Maximization means maximizing the present value of a course of action(NPV=GPV OF BENEFITS – INVESTMENT).The significance of Wealth Maximization is that along with the share holders it takes care of Lenders or Creditors, Workers or Employees, Public or Society, Management or Employer.
- Ensuring a fair return to shareholders.
- Building up reserves for growth and expansion.
- Ensuring financial discipline in management.