Objectives of Financial Management
Primary aim of financial management is to maximize shareholder’s wealth, which is referred to as the wealth maximization concept. The main objective of financial management is profit maximization. The finance manager tries to earn maximum profits for the company in the short-term and the long-term. The market price of a company’s shares are linked to the three basic financial decisions which you will study a little later. This is because a 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 maximization of the market value of equity shares. 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 alternative the best is selected.