Answer: Objectives of Financial Management?
According to Kuchal S. C., “Financial Management deals with procurement of funds and their effective utilization in business”.
The basic objectives of financial management are stated as follows:
I. Profit Maximization, II. Wealth Maximization & III. Social Satisfaction.
I. Profit Maximization:
It is considered as the basic principle of any business activity. According to this principle, all functions of business aim at profit. The concept of profit maximization is traditional in nature and is based on the assumption that profit is a tool of measuring the success of any business firm.
Profit maximization is considered to be the most important business objective since, it is difficult for any business firm to survive without profit; success can be measured with the profit earning capacity of an organization; high profit results in better returns (i.e. dividend) to shareholders; increase in profitability of an organization allows the use of surplus funds for the future expansion of the firm; and it has to be achieved for socio‐economic welfare.
II. Wealth Maximization:
According to Prof. Soloman Ezra, the ultimate goal of financial management should be maximization of owners’ wealth.
Wealth maximization is also known as ‘value maximization’ i.e. maximizing net present value of a firm. The focus of financial management must be on wealth maximization of the owners’ i.e., equity shareholders.
The wealth of shareholders can be reflected in market value of shares. It can be said that, the wealth of equity shareholders is maximized only when market value of equity shares is maximized.
III. Social Satisfaction:
Business firms now‐a‐days not only think about investors, but also consider welfare of people in general.As the business firms operate in society, they are responsible towards the society. They do so by protecting the interests of suppliers, customers, creditors, employees of the company and government.
The shareholders expect high rate of dividend, customers want products of good quality at reasonable prices, society requires effective and efficient use of scarce resources of production and government insists on compliance of rules and regulations and regular payment of taxes. A business firm has to fulfill all such social responsibilities.
Thus, along with profit maximization and wealth maximization, social satisfaction is an equally important objective of any business firm.