Business Studies Part I
Business Studies Part II

Objectives

The prime objective of financial management is to maximize shareholder’s wealth by maximizing the market price of a company’s shares. Primary aim of financial management is to maximize shareholder wealth, which is referred to as the wealth maximization concept. The market price of a company’s shares is linked to the three basic financial decisions which you will study a little later. This is because company funds belong to the shareholders and the manner in which they are invested and the return earned by them determines their market value or price. It means the maximization of the market value of equity shares. The market price of equity share increase if the benefits from a decision exceed the cost involved. Thus, all financial decisions aim at ensuring that each decision is efficient and adds some value. Such value additions tend to increase the market price of shares. Therefore, when a decision is taken about investment in a new machine, the aim of financial management is to ensure that benefits from the investment exceed the cost so that some value addition takes place. Similarly, when the finance is procured the aim is to reduce the cost so that the value addition is even higher. In fact, in all financial decisions, major or minor, the ultimate objective that guides the decision-maker is that some value addition should take place so that the market price of equity shares is maximized. It can happen through efficient decision making. Decision-making is efficient if, out of various available alternatives the best is selected.

Objectives of Financial Management:

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-

  1. To ensure regular and adequate supply of funds to the concern.
  2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
  3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
  4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
  5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.