Goals of Financial Management Essay

Money required for carrying out business activities is called business finance. Almost all business activities require some finance. Finance is needed To establish a business , To run it To modernize it To expand it or diversify It is required to buy whole variety of assets, they may be tangible like machinery ,factories,building,offices or intangible like patents, technical expertise etc. Success of business depends considerably on how well the funds are deployed in assets Financial circumspection is concerned with optimum procurement as well as usage of finance.The financial management has to take three important decision viz. (i) enthronization decision i. e. , where to invest fund and in what amount, (ii) Financing decision i. e. , from where to raise funds and in what amount, and (iii) Dividend i. e. , how much to pay dividend and how much to retain for future expansion. In order to make these decisions the management must have a clear understanding of the documentary sought to be achieved. It is generally agreed that the financial objective of the firm should be maximation of owners economic welfare.There are two widely discussed approaches or criterion of maximizing owners welfare (i) wage maximization, and (ii) Wealth maximization. Profit maximization would probably be the most commonly cited business goal, but this is not a very precise objective. Do we pissed profits this year? If so, then actions such as deferring maintenance, letting inventories run down, and other short-run, cost-cutting measures will tend to increase profits now, but these activities arent needs desirable.The goal of maximizing profits may refer to some sort of long-run or average profits, but its unclear exactly what this means. First, do we mean something like accounting give the axe income or earnings per share? As we will see, these numbers may have little to do with what is proper or bad for the firm. Second, what do we mean by the long run? As a famous economist o nce remarked, in the long run, were all dead More to the point, this goal doesnt tell us the appropriate trade-off between current and future profits.Profit maximation Maximization of profits is very often considered as the main objective of a business enterprise. The stockholders, the owners of the business, invest their funds in the business with the hope of getting high dividend on their investment. Moreover, the profitability of the business is an indicator of the sound health of the organization, because, it safeguards the economic interests of various social groups which are directly or indirectly connected with the guild e. g. shareholders, creditors and employees.All these parties must get reasonable return for their contributions and it is possible only when company earns higher profits or sufficient profits to discharge the obligations to them. As long as we are dealing with for-profit businesses, only a slight modification is needed. The total revalue of the stock in a corporation is alone equal to the value of the owners equity. Therefore, a more general way of stating our goal . Finally, our goal does not imply that the financial manager should take illegal or unethical actions in the hope of increasing the value of the equity in the firm.What we mean is that the financial manager best serves the owners of the business by identifying goods and services that add up value to the firm because they are desired and valued in the free marketplace If we assume that stockholders buy stock because they seek to gain financially, then the manage is obvious Good decisions increase the value of the stock, and poor decisions decrease the value of the stock. The goal of maximizing the value of the stock avoids the problems associated with the different goals we listed earlier.There is no ambiguity in the criterion, and there is no short-run versus long-run issue. We explicitly mean that our goal is to maximize the current stock value. Because the goal of financial management is to maximize the value of the stock, we need to learn how to identify those investments and financing arrangements that favorably impact the value of the stock. This is precisely what we will be studying. In fact, we could have defined incorporate finance as the study of the relationship between business decisions and the value of the stock in the business.Wealth Maximization The term wealth means shareholders wealth or the wealth of persons who are involved in business concern. this is also known as value maximization or net worth maximization The wealth maximization (also known as value maximization or Net Present Worth Maximization) is also universally authoritative criterion for financial decision making. The value of an asset should be viewed in terms of benefits it can produce over the cost of capital investment. Wealth maximization is based on the concept of cash flow . cash flow are a reality and not based on subjective. It considers time value of m oney.