What is Financial Management? Objective of Financial Management

What is Financial Management? Meaning of Financial Management

The main objective of financial management is to acquire finance at low interest and utilize the same finance for maximization of profit. It is treated as the most important functional area of total business management. It is said that “Without adequate finance, no business can survive and without efficient financial management, no business can prosper and grow.”

Financial management consists of:

• Proper planning of finance,
• Efficient organizing of finance,
• Effective channelization of finance,
• Have strict control over finance.

Definition of Financial Management

According to Weston and Brigham the definition of financial management are:

“Financial management is an area of financial decisions-making harmonizing individual motives and enterprise goal".”

According to Dr. S. N. Maheshwari, the definition of financial management are: ↓

“Financial Management is concerned with raising financial resources and their effective utilisation towards achieving the organizational goals.”

Objectives of Financial Management

Scope, objectives, fundamentals of financial management are given in the diagram below.↓

Image credits © Manoj Patil.

Aims, importance, nature, basics, and objectives of financial management are: ↓

1. Proper Mobilization of Funds,
2. Proper Utilization of Funds,
3. Earning more Profits,
4. Maintaining Liquidity,
5. Maximizing Shareholders Wealth,
6. Reserves,
7. Increase in Overall Efficiency,
8. Generates Goodwill.

Fundamentals, goals and objectives of financial management are discussed in brief. ↓

1. Proper Mobilization of Funds

In financial management, funds can be mobilized (collected) from various sources. There must be a balance between owned fund and borrowed funds. Too much emphasis on borrowed funds can put a burden on repayment and debt servicing.

2. Proper Utilization of Funds

In financial management, funds collected from various sources should be put into productive use. Optimum utilization of funds can be done by minimizing wastages, avoiding unviable projects, having a shorter credit period, avoiding unnecessary blockage of funds in inventory, etc.

3. Earning more Profits

In financial management, earning more profits is one of the primary goals of the firm. The finance manager should ensure that the firm generate profits not only for short term but also for long term. Profit is necessary for fair dividend-payment, proper wages, growth and diversification, etc.

4. Maintaining Liquidity

In financial management, it is necessary to keep balance between inflows and outflows of funds properly. If outflows exceed inflows, sooner or later the organization may face the liquidity problems.

5. Maximizing Shareholders Wealth

In financial management, a firm should ensure a fair return to shareholders by way of regular dividend, bonus issues, etc. If the company is performing well, then there are increases seen in the value of share's vise-versa.

6. Reserves

An important aim of financial management is to build up necessary reserves for facing unforeseen contingencies. The entire profit earned by an organization is not distributed among shareholders, but a part of it retained for future purposes.

7. Increase in Overall Efficiency

In financial management, proper allocation of funds for various activities within the organization results in overall efficiency.

8. Generates Goodwill

One of the objectives of financial management is to generate good name and reputation. The goodwill of the firm helps it to survive not only in short run, but also to succeed in the long run.