Objectives of Financial Management
The objectives or goals or financial management are- (1) Profit maximization, (2) Return maximization, and (3) Wealth maximization. We shall explain these three goals of financial management as under:
(1) maximiGoal of Profit zation- Maximization of profits is generally regarded as the main objective of a business enterprise. Each company collects its finance by way of issue of shares to the public. Investors in shares purchase these shares in the hope of getting medium profits from the company as dividend It is possible only when the company's goal is to earn maximum profits out of its available resources. If company fails to distribute higher dividend, the people will not be keen to invest their money in
Such firm and persons who have already invested will like to sell their stocks. On the other hand, higher profits are the barometer of its efficiency on all fronts, i.e., production, sales and management. A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits' means general rate of profit earned by similar organization in a particular area.
(2) Goal of Return Maximization- The second goal of financial management is to safeguard the economic interest of the persons who are directly or indirectly connected with the company, i.e., shareholders, creditors and employees. The all such interested parties must get the maximum return for their contributions. But this is possible only when the company earns higher profits or sufficient profits to discharge its obligations to them. Therefore, the goal of maximization of returns are inter-related.
3. Goal of Wealth Maximization- Frequently, Maximization of profits is regarded the proper objective of the firm but it is not as inclusive a goal as that of maximizing it value to its shareholders. Value is represented by the market price of the ordinary share of the company over the long run which is certainly a reflection of company's investment and financing decisions. The log run means a considerably long period in order to work out a normalized market price. The management ca make decision to maximize the value of its shares on the basis of day-today fluctuations in the market price in order t raise the market price of shares over the short run at the expense of the long fun by temporarily diverting some of its funds to some other accounts or by cutting some of its expenditure to the minimum at the cost of future profits. This does not reflect the true worth of the share because it will result in the fall of the share price in the market in the long run. It is, therefore, the goal of the financial management to ensure its shareholders that the value of their shares will be maximized in the long-run. In fact, the performances of the company can well be evaluated by the value of its share.
The objectives or goals or financial management are- (1) Profit maximization, (2) Return maximization, and (3) Wealth maximization. We shall explain these three goals of financial management as under:
(1) maximiGoal of Profit zation- Maximization of profits is generally regarded as the main objective of a business enterprise. Each company collects its finance by way of issue of shares to the public. Investors in shares purchase these shares in the hope of getting medium profits from the company as dividend It is possible only when the company's goal is to earn maximum profits out of its available resources. If company fails to distribute higher dividend, the people will not be keen to invest their money in
Such firm and persons who have already invested will like to sell their stocks. On the other hand, higher profits are the barometer of its efficiency on all fronts, i.e., production, sales and management. A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits' means general rate of profit earned by similar organization in a particular area.
(2) Goal of Return Maximization- The second goal of financial management is to safeguard the economic interest of the persons who are directly or indirectly connected with the company, i.e., shareholders, creditors and employees. The all such interested parties must get the maximum return for their contributions. But this is possible only when the company earns higher profits or sufficient profits to discharge its obligations to them. Therefore, the goal of maximization of returns are inter-related.
3. Goal of Wealth Maximization- Frequently, Maximization of profits is regarded the proper objective of the firm but it is not as inclusive a goal as that of maximizing it value to its shareholders. Value is represented by the market price of the ordinary share of the company over the long run which is certainly a reflection of company's investment and financing decisions. The log run means a considerably long period in order to work out a normalized market price. The management ca make decision to maximize the value of its shares on the basis of day-today fluctuations in the market price in order t raise the market price of shares over the short run at the expense of the long fun by temporarily diverting some of its funds to some other accounts or by cutting some of its expenditure to the minimum at the cost of future profits. This does not reflect the true worth of the share because it will result in the fall of the share price in the market in the long run. It is, therefore, the goal of the financial management to ensure its shareholders that the value of their shares will be maximized in the long-run. In fact, the performances of the company can well be evaluated by the value of its share.
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