|Goals of Financial Management
For any business or individual, it is important to be fluent in the art of financial management. Financial management is the process of attaining goals through careful financial planning, by efficiently controlling, organising, and reviewing the financial resources at disposal. Since these resources are limited and conditions in the finance world constantly change, effective financial management is what guides businesses and individuals toward success.
In this blog, let’s take a look at the various objectives of financial management, and understand why achieving these financial management goals is vital for any business or individual to thrive.
Understanding Different Types of Financial Management Goals
At its core, the primary goal of financial management is to optimise financial resources for the betterment of an individual or an organisation, emphasizing effective financial planning. To achieve this large goal, one has to break it down into smaller goals so it can be made more attainable and easier to manage. Let’s explore different financial management goals in detail
1. Profit Maximization
Profit maximisation is one of the main goals of financial management. Profitability is not just a sign of a healthy business but it also allows it to stay competitive, expand, and innovate.
To increase profit, one has to either increase revenue, decrease expenses, or do a combination of both. For profit maximization in financial management, one has to make the maximum possible revenue while keeping expenses as low as possible. This is done through different ways such as pricing strategies, optimising production, or increasing the number of products sold. This however is a very intricate process because if the goods or services are priced too high, the demand for them might fall. Similarly, if there is too much cost cutting, the quality of the product and therefore its demand might suffer. Thus a very delicate balance has to be struck while remaining compliant with regulations and uncompromising ethics.
2. Wealth Maximization
Wealth maximisation is a more modern approach compared to profit maximisation. Profit maximisation has certain limitations such as not considering the scale of business, ignoring the time value of money, and neglecting the interests of the shareholders. It is also a short-term objective. On the other hand, wealth maximization in financial management is a more holistic objective, as it takes into account the interest of shareholders, and aims to maximise the value of the business in the long term. Its structure is built on cash flows rather than profit, and it also considers the time value of money, that is a rupee is worth more today than tomorrow. Wealth maximisation considers how a company’s dividend policy affects the market price of its shares. Not only do high dividends keep shareholders happy, but they also create a high value and reputation for the business in the market.
3. Maintenance of Liquidity
Liquidity means how quickly and efficiently an asset can be converted to cash. For example, if you have invested in gold and want to liquidate it, you won’t have much trouble finding buyers for a fair price. If you have a property however, you might find it hard to sell quickly, and even if you do find buyers you might not get a fair price for it. To make sure that there are ample resources available to meet short-term obligations, managers need to strike a balance between profitability and liquidity.
If a business needs funds due to some emergency, it needs to have assets it can sell off quickly and without incurring substantial loss to raise funds. The possibility that a business would not be able to do so is known as liquidity risk, so it’s an important objective of businesses to maintain liquidity.
If a business has an overflow or an underflow of cash that can spell trouble. While having a high cash reserve can mean taking advantage of opportunities such as bulk buying when prices are low or lending money when interest rates are high, idle cash resources can lead to missed investment opportunities and are overall suboptimal. That’s why businesses need to strike a balance, and make sure that cash is neither in excess nor insufficient to meet operational needs and seize strategic opportunities.
4. Financial Requirements Planning
Through financial management, one can also correctly and effectively estimate the various requirements of a business such as funds needed to start or expand, contingency funds, marketing, operational expenses, working capital, and capital expenditures. Financial managers assess these funding requirements and make sure that the business has the necessary resources when they are needed, and that there is no significant shortage or surplus. To do this a lot of different factors are considered such as the scale of production, scale of operation, number of employees, and technology needed. Proper financial requirement planning helps in avoiding financial crises and facilitates smooth operations.
5. Proper Mobilization
Mobilisation of funds is done after the estimation of financial requirements. Mobilising funds means gathering and assembling funds for various projects such as expansion or research within a business. Financial managers need to identify suitable sources of funding such as loans or investors and deploy them wisely. Through proper mobilisation, managers can ensure efficient and sustainable growth of the business.
6. Resources Utilization
After assembling funds and other required resources, it’s time to efficiently use them. One of the aims of financial management is to make sure these resources are effectively used. Financial managers use various tools and techniques such as financial ratio analysis, return on investment ratio, debt to equity ratio, cash flow forecasting, and cost-benefit analysis to optimise the use of resources and minimise cost and waste. Proper utilisation of resources means more productivity and thus more profitability which then creates more value for the business.
7. Improved Efficiency
One of the most important objectives of financial management is efficient use of resources. This doesn’t just include efficient utilisation of capital resources, but also of other key components such as human resources, technological resources, production line, supply chain, and other assets, because they all contribute to the bottom line. Efficiency is improved by minimising wastage, streamlining processes, investing in technology such as automation, and optimising various aspects of business operations.
8. Identifying suitable investments
Another way for businesses to be efficient is by investing their profits. As we said before, too much cash sitting idle is a bad thing so businesses channel those funds into various investment avenues that align with their overall goals and risk tolerance. Financial managers are thus responsible to identify and invest in the best investment options that offer optimal returns. They also have to thoroughly study the market and need to be mindful of the tax implications of the investments. They employ strategies that minimise tax liabilities and maximise profit after tax. Mitigating risk is another important function that is achieved by diversifying investments by allocating resources across a range of assets such as stocks, real estate, commodities, and funds.
9. Allocation of funds
The different departments and operations within a business require different resources and funds. An important task for financial managers is determining how many resources go where. They analyse current and historical records and prepare a budget that outlines an optimal allocation of resources that can maximise the benefit to the business.
10. Risk Management
Risk is an inevitable part of any business, and through effective financial management, one can not only recognise and understand various threats but also implement strategies to mitigate them. A business faces many different kinds of risks such as –
- Market risk – Risk that arises due to changes in market conditions.
- Operational risk – Risk that arises due to processes within the business like disruption of supply chain or human error.
- Credit risk – This is the chance that the business will not be able to pay back the loans it took to start or expand, and default.
- Legal risk – Risk that arises when the business fails to comply with the law and faces lawsuits.
- Liquidity risk – The danger that an asset can’t quickly be traded without incurring substantial loss.
With solid Risk Management strategies, financial managers can lessen the impact of unforeseen events, make sure everything operates smoothly, and safeguard the business against potential setbacks.
While everyone wants to make a quick profit, it’s not always the most sustainable option. For long-term success, one has to consider many different aspects such as being compliant with regulations, ethically managing resources, having contingency plans, and balancing risk with reward. Integral to this success is strategic financial planning. A business must always keep its reputation in mind when making financial decisions, and maintain goodwill along with customer satisfaction. Financial management is a continuous process, so it’s crucial to regularly review and monitor key financial metrics, market conditions, and the overall economic landscape to adapt strategies, identify emerging opportunities, and address potential risks.
The many financial management goals we discussed above – from profit maximisation to risk management, ensure the long-term survival of a business. Each objective plays a crucial role in optimising financial resources and achieving sustainable growth, and by understanding these objectives, one can make confident financial decisions and enjoy a secure and prosperous future.