Financial management,Objectives of Financial Management, difference between profit maximization and value maximization.

 

Financial management 

Financial Management...

Financial management is control the overall management of finance in business.

All the management functions like planning, organising, directing, controlling of finance are performed in financial management.

In Planning manager decide how much capital is required for doing business activities and attain organization goals.

Financial planning is deciding in advance how much capital should be required to run business and attaining goals.financial planning is the process of estimating the capital required and from where we get capital amount.

In Organising finance manager raise the capital from different sources and employ it in various business activities.

In controlling finance manager control all the financial activities of the organization.

Finance manager check is there is under Capitalization or over Capitalization in organization and see whether we attain our financial goals or not within a specified period of time.

Objectives of Financial Management...

Finance manager doing financial management and control over all financial department of organization.By doing financial management his main objective is:-

1) Profit Maximization -As we know every business,company, organization other than Government, main objective is to earn profit,hence the objective of financial management is also profit maximization.However ,it cannot be the sole objective of a company.Some of the demerits of this objective as follows:-

Although every company wants to maximize his profits but it is not a sole objective of company or organization there are other matters are to consider for measure company success,In financial management finance manager not clearly explain this objective .

* The term profit is not clear .It does not clarify what it means.For eg ,It may be short term or long term,it may be total profit or rate of profit etc.

*Profits should also be related to the risk involved.The decisions should be taken after considering the risk in a project also.If company wants to maximize his profits so risk is also maximize because without taken risk no one can get success.

*Profits maximization objective only focus on maximize profits not consider the social responsibility of business,which we have to fullfill in doing business for example an alcohol making company earn more profits but it have negative impact on health.So profit maximize is a narrow concept, merely run behind profits without taken  social responsibility in consideration.

*It does not take into account the time  pattern of returns . Project X may give high profits than project Y but if Project X is taken more time so project Y is preferred.

2) Wealth/Value Maximization -Wealth / Value Maximization means the maximization of the price of a company's share.Investors buy the shares as an investment.It is the duty of the finance manager to see that the shareholders get good returns on the shares.Company's share value is increase by its sales and it's fame in the market.If company earn profit and have Goodwill its share price is rise otherwise company share price market is down.Hence company value is represented by the market price of the company . Sometimes finance manager take decision to keep in mind the short term profit but it may effect it's long term profitability that'why company's share price will come down,So finance manager must focus on maximize his value not only maximize his profits, because maximize his value is more important because by maximize his company value many investors encourage to invest the capital in company so company will get more success.

To achieve wealth/ Value Maximization,the finance manager has to take these important decisions carefully:-

1)  Investment decision - to maximize value finance manager should have to take investment decision carefully.Finance manager invest capital in those projects which is profitable for long run also ,at the time of investment he also consider that working capital also be kept for doing day to day expenses.

2) Finance decisions - In finance decision manager also have knowledge of all the available resources of finance and it's advantages,risk ,cost , control.

3) Dividend Decisions - Finance manager also consider the dividend decision carefully for maximize company value.finance manager decide how much dividend is distributed among shareholders,and how much profits retained for future growth and development because dividend policy also effects the company market price of share .

            

Profit Vs Wealth Maximization

1) Profit Maximization - it's main objective is to earn large amount of profits.

Wealth Maximization - it's main objective is to maximize share value of company.

2) Profit Maximization - It emphasis on short term profits.

Wealth Maximization - It emphasis on long term value of company.

3) Profit Maximization - It does not take into account risk and uncertainty.

Wealth Maximization - It consider risk and uncertainty also.

4) Profit Maximization -It is easy to calculate.

Wealth Maximization - It is not easy to calculate it is dependent upon companies long term profitability and goodwill.