Primary Goals of Financial Management

Financial management is important for both personal and business finance. It involves planning, organizing, and controlling money to achieve specific goals. The main aim of financial management is to use money and financial processes effectively to meet company goals and increase shareholder value. However, the specific goals of financial management can vary depending on the size, industry, and objectives of the organization.

For example, a small startup might focus on growing quickly and entering new markets, while a large company might aim for steady income and paying dividends to shareholders. In the tech industry, financial management might focus on innovation and reinvesting in research, while a manufacturing company might prioritize cutting costs and improving efficiency. Nonprofit organizations aim to maximize the impact of their funds rather than making a profit.

Primary Goals of Financial Management

The main goals of financial management aim to keep the company financially healthy and increase its value for everyone involved. Here are the key goals of financial management.

1. Maximizing Profits in Financial Management

The main goal of financial management is to maximize profits. This means making decisions that increase a business's earnings per share (EPS) and overall profitability. Here are key points about profit maximization:

• Measuring Tool: Profitability measures a company’s efficiency and helps analyze its success and performance.
• Different Views: Profit can mean different things to different people, like short-term vs. long-term profits, total profits, profit per share, and profits before or after tax.
• Time Value of Money: Profit maximization doesn’t consider the time value of money, meaning it treats all profits the same, regardless of when they are earned.
• Impact on Decisions: Profit maximization guides investment and financing decisions, influencing choices about new projects, buying assets, and raising capital.
• Social and Economic Welfare: Profits, when used and distributed correctly, pay for capital, fixed assets, labor, and organization, contributing to economic and social well-being.

2. Maximizing Wealth in Financial Management

Wealth maximization is a financial strategy aimed at increasing a business’s value by boosting the value of its shareholders' shares. This approach requires management to seek the highest returns on investments while managing risks. Wealth maximization is better than profit maximization because it considers a wider range of factors. Changes in a company’s share price are the clearest sign of wealth maximization. 

For example, if a company buys valuable property, investors might see this as a good move because it could lead to higher profits in the future. Similar positive reactions can happen if a company consistently shows growth in cash flow or profits.

Wealth maximization has both pros and cons. Investors should consider this factor before investing in any company. However, this approach can sometimes lead to unethical practices such as exploiting workers, harming the environment, and neglecting social responsibilities.

3. Liquidity Maintenance

Liquidity maintenance means managing a company's cash and financial resources to ensure it can meet its financial commitments when they are due. This includes methods and activities to improve, maximize, and preserve a company's liquidity. Here are some key points:

• Visibility and Control: Good liquidity management provides clear visibility and control over a company's cash and financial resources. This can be achieved through centralized procedures and technologies that offer real-time information on the company’s liquidity status.
• Complexity: Managing liquidity can be particularly complex for companies operating in multiple countries and currencies, and dealing with different financial institutions. Effective bank liquidity management requires complete insight into the company’s liquidity through centralized operations.
• Risk Management: Liquidity management also involves managing the risk associated with liquidity. This means analyzing and reducing liquidity risk exposure, ensuring the company has enough cash and collateral to meet its obligations without incurring major losses.
• Financial Performance: Effective liquidity management directly impacts a company’s working capital and financial performance. It helps firms set aside cash for payments, avoid going into debt or selling assets under unfavorable terms, and build a strong financial foundation.
• Tactics and Techniques: Liquidity management tactics include proactive budgeting, efficient invoicing, effective collections management, and maximizing working capital. Companies may use different liquidity management techniques based on their financial maturity and specific needs.

4. Estimating Financial Needs Correctly

Accurately estimating financial needs involves figuring out how much money is required to start or operate a business and making sure there are enough funds available when needed. Here are the steps:

• Predicting income: Estimate how much money the business could earn in the first few months using industry information.
• Planning a budget: Create a preliminary budget for the first year based on loans from the bank and profits kept aside.
• Calculating costs: Figure out the expenses of making the product or service, including wages, materials, and administrative costs.
• Planning for unexpected expenses: Take into account unforeseen costs, changes in the market, and other events that could affect the company's financial needs.

5. Effective Resource Allocation

Appropriate mobilization in financial management means distributing resources efficiently across all departments to improve efficiency. The goal is to maximize profits in both the short and long term. 

Managing liquidity effectively ensures there is enough cash available when needed. Financial control establishes key performance indicators (KPIs) and assists businesses in achieving their goals. Monitoring and analyzing mobilization costs helps project managers identify any incorrect estimates and make adjustments for future projects.

6. Using Financial Resources Effectively

Here are some important ways to effectively use financial resources:

• Allocating funds: Distribute funds across different parts of the company based on their value and potential for sustainability and profitability.
• Financial planning: Create a detailed financial plan outlining the organization’s goals, strategies, and how resources will be allocated.
• Financial control: Implement procedures to monitor and manage how funds are used effectively.
• Managing risks: Assess and manage financial risks to minimize potential losses and maximize rewards.
• Investment decisions: Make informed investment choices by conducting thorough financial research and weighing potential benefits and risks.
• Monitoring and evaluation: Continuously monitor and evaluate how financial resources are used to identify areas for improvement and make necessary adjustments.

7. Improved Efficiency

Financial management aims to boost efficiency by simplifying operations, cutting costs, and optimizing resource use. It measures efficiency through indicators like return on investment, gross profit margin, and operating expense ratio. 

Efficient management involves maximizing time, effort, and resources, reducing expenses, and increasing returns on investments. It also involves controlling and monitoring financial resources to achieve business goals effectively.

8. Meeting Financial Obligations to Creditors

Financial management is important for companies to fulfill their obligations to creditors, such as loan repayments and contractual agreements. This includes budgeting, allocating funds, maintaining investor relations, and implementing sound financial practices like stringent lending standards, conservative regulations, and risk assessment. This ensures the financial stability and profitability of a company.

9. Establishing Reserves

Financial management includes setting aside funds to cover unexpected expenses, economic downturns, or investment opportunities. Reserves stabilize a company's finances by acting as a cushion against unforeseen events and high costs.

10. Lowering Cost of Capital

Financial management uses cost-effective financing options, optimal capital structures, and debt management to minimize a company's cost of capital. The cost of capital is the minimum return a company must achieve to create value. 

Optimal capital structure balances debt and equity financing to maximize market value while reducing capital costs. Effective financial management planning guides long-term strategies, investment decisions, and provides insights into funding, liquidity, profitability, and cash flow.

Final Thoughts 

By using good financial practices, businesses can become more efficient with money, make more profit, and ensure they last a long time. Each company should adjust their strategies to fit their own needs and goals. It’s also important to regularly check and change financial plans to succeed in the long run.

FAQs

What does wealth maximization mean in financial management?

Wealth maximization in financial management aims to increase a company's value to boost the value of its investors' shares. It involves striving for maximum returns on invested money while managing risks to avoid losses.

What strategies are used to maximize profits in financial management?

To maximize profits, financial managers focus on keeping customers loyal, increasing revenue, cutting costs, studying markets, reviewing financial statements, and encouraging team efforts.

Why is wealth maximization important in financial management?

Wealth maximization in financial management focuses on growing a company's worth to enhance the value of shareholders' investments.

How does financial management's main goal affect decision-making in an organization?

Financial management aims to use resources and strategies effectively to achieve company goals and increase shareholder value. This influences decision-making by prioritizing financial efficiency and creating value.