Financial Management
Financial management is a branch of management that specifies planning all the financial activities. The deals with all activities deliver to finance like equalization of funds, utilization of funds, managing the financial resources, etc.
Scope and Objectives of Financial Management
Financial management has a broad scope that involves different kinds of decisions. The scope of financial management is discussed below:
Financial Decisions
These are the decisions related to equalization of funds, utilization of those funds, forecasting the returns based on the investment, etc.
Investment Decisions
The name itself specifies that the decisions related to the investment. Whether it is fixed assets, working capital, investment, etc. Also, during the time of expansion of a form, the liquid assets and fixed assets will be considered as these investment decisions.
Dividend Decisions
These are the decisions related to the sharing activity of obtained profit. The sharing will be done in two ways. One is profit for shared holders, and the other is retained profits.
Discuss the Objectives of Financial Management?
The objectives are nothing but the goals of financial management for which we are making different kinds of decisions. This means objectives are the final aims of a particular organization or form or even a single project. So, in addition to the meaning and scope of financial management, it is also important to explain the objectives of financial management. They are as follows:
Need to Get Aware of Availability of Funds
It is the primary objective of financial management. Every business organization should reach its peak position only with the help of well-structured financial management. So it is essential to make sure that all the availability of funds and also plan for the equalization of funds from variable resources.
Structure of the Capital Optimally
It is also the main objective of financial management. It is to utilize all the capital in a structured way to its maximum extent. It means a single penny should not be wasted and also should not be misused or left. We should be able to balance both the equity and the capital in a proper way.
Optimum Utilization of Funds
We all know that every organization's final motto is to earn a profit. Earning more profit is not only increasing sales and production. It also happens due to the reduction in cost and capital. So the Financial Manager should ultimately utilize all the funds.
Efficient in Securing Funds
It is another basic objective of financial management, which focuses on providing proper security to the available funds. Acquiring huge funds is not only a big task. Ultimate utilization and providing proper safety and security to those funds is also such an important duty and objective of the Financial Manager.
Maintain Records
Financial management also helps to maintain proper records of every transaction of an organization related to monetary terms. It is one of the provisions to maintain security for the available funds and optimum utilization of funds.
Financial Information and Planning
Another critical objective of financial management is to provide proper financial information to the higher authorities as well as to the clients and lenders. Also, the Financial Manager should have a right plan with him regarding the funds, whether it is equalization or utilization or whatever it is.
These are the various goals and objectives of financial management. As it has a broad scope, the objectives also keep on increasing day by day according to the changes.
Functions of Financial Management
Based on the objectives and scope of financial management, the functions can be designed and derived. Because without knowing the purpose, we can't do an action right. Similarly, functions are the duties done by Financial personnel. Some of those functions are,
Controlling all the financial decisions.
Acquisition of funds from the available resources.
Managing liquid cash and cash-related activities.
Maintaining proper records for all transactions.
Designing security measures to protect financial resources.
Overview Of Financial Management
Financial Management is the planning, directing, and utilizing the financial activities of an organization. It means applying the general management principles in the financial aspect of the enterprises.
Invest decisions include investment in fixed assets known as capital budgeting and investment in current assets which is known as the working capital investments.
Financial decisions include the raising of finances from several sources which will depend on investment decisions, cost of financing, period of financing, and returns
Decisions on dividends are taken by the financial manager and they are of two types.
Dividends for shareholders where the dividend and the rate of dividend have to be decided.
Retained profits and the amount has to be finalized which depends on the plans of expansion of the enterprises.
There are several objectives of financial management.
One of the objectives of financial management is to ensure a regular supply of funds to the resources of concern.
It also entails making sure that the shareholders are paid out adequately and on time which will be dependable on the earnings of the enterprise, the expectation of shareholders, and the market price of the shares.
It ensures optimum utilization of funds at the least cost.
It is responsible for a safe investment that involves the least risk of loss.
It also ensures to plan the adequate capital structure of the enterprise where debt and equity capital are in perfect balance with each other.
There are several functions of Financial management.
Estimation of capital requirement is one of the functions of financial management which will depend on expected costs and profits and future programs that will require funds. It increases the earning capacity of the enterprises.
A short-term and long-term debt analysis is required to understand the capital structure and determine the capital composition of the enterprise. It must contain equity funds of the company as well as funds raised by outside sources as well.
The choice of sources of the funds has to be determined. Choices such as issues of shares and debentures have to be finalized along with the loans that are to be taken from the bank and public deposits that are to be drawn in the form of bonds.
Investment of funds has to be decided by the financial manager for the purpose of allocation of funds into promising ventures with adequate returns.
Disposal of surplus has to be determined by the financial manager in two ways namely, declaration of dividends and retained profits.
Management of cash is one of the major functions of financial management as cash is required for many purposes like paying wages and salaries, payment of bills and meeting current liabilities, maintenance of enough stock and payment to the creditors or purchase of raw materials, etc.
The financial manager not only procures and utilizes funds, it also has a right to exercise control over the financial resources and decisions which can be done by ratio analysis, cost and profit control, etc.
Quick Tips To Understand This Chapter
Financial management has to be understood closely in order to understand its operations and functions of it.
Study online to understand the concepts and functions of financial management. Online classes are also available on Vedantu’s official website which will surely help any student who is stuck in understanding financial management.
Clear doubts if there are any. Financial management is an easy subject when understood properly so a student must read the textbook and clear doubts later on.
Solve practice papers to stay in touch with the chapter. Vedantu offers practice papers that can be downloaded from the official website.
Refer to the notes for a better understanding. Students can also check the notes along with the textbooks to understand financial management for in-depth knowledge regarding the chapter.
Lastly, students pay closer attention in the classes, financial management can be a vast chapter to memorize with all the points on its functions and objects so a student must be willing to be attentive during the classes.
Making notes is one of the best ways to understand the chapter. Instead of simply relying on the PDF notes that are available on Vedantu’s website, students must make their own notes in order to reflect on the knowledge later before the exams.
Revising financial management is also the best way to master this topic. Students should be able to answer all the points mentioned in this chapter. So revise as much as possible.
Conclusion
Hence we understood financial management and its objectives. So it is an organized way of maintaining, planning, and forecasting all financial decisions. It involves various objectives and functions. All together strive for the only ultimate goal, which is nothing but organizational growth.
FAQs on Financial Management Objectives: A Complete Guide
1. What is the primary objective of financial management as per the CBSE Class 12 syllabus for 2025-26?
The primary objective of financial management is wealth maximisation. This core concept focuses on increasing the market value of a company's equity shares. By maximising the share price, the company directly increases the wealth of its owners, the shareholders, which is considered the ultimate goal of any business.
2. What is the difference between the objectives of profit maximisation and wealth maximisation?
Profit maximisation aims to increase a company's net profit, which is often a short-term goal and can ignore risk. In contrast, wealth maximisation focuses on increasing the market value of shares, which is a long-term objective. Wealth maximisation is a broader concept because it considers the time value of money, risk levels, and the overall market perception of the company's performance.
3. Why is wealth maximisation considered a superior objective to profit maximisation for a company?
Wealth maximisation is considered a superior objective for several key reasons:
- Long-Term Focus: It promotes long-term, sustainable growth rather than short-term gains that might harm the company later.
- Considers Risk: It accounts for the risk associated with business decisions. A high-risk project might yield high profits but could decrease the company's share value if it fails.
- Time Value of Money: It recognises that a rupee earned today is more valuable than a rupee earned tomorrow.
- Benefits Owners Directly: It directly links financial decisions to the market value of equity shares, which is the true measure of the shareholders' wealth.
4. What are the three main types of financial decisions every financial manager has to make?
A financial manager is responsible for making three fundamental types of decisions:
- Investment Decision: This involves deciding where to allocate funds. It includes long-term decisions like purchasing new machinery (capital budgeting) and short-term decisions related to managing cash, inventory, and receivables (working capital management).
- Financing Decision: This concerns raising funds from various sources. The manager must decide the optimal mix of debt (loans, debentures) and equity (shares) to fund the company's operations and investments.
- Dividend Decision: This involves deciding how much of the company's after-tax profit should be distributed to shareholders as dividends and how much should be retained for future investment and growth (retained earnings).
5. How do the investment, financing, and dividend decisions interlink and affect each other?
These three decisions are highly interdependent and cannot be made in isolation. For example, a major investment decision to build a new factory will require a corresponding financing decision on how to raise the funds (debt or equity). The chosen financing mix will then influence the dividend decision, as higher debt means higher interest payments, leaving less profit available for shareholders. Similarly, a generous dividend policy means less retained earnings are available for future investments.
6. What is the importance of effective financial management for a business organisation?
Effective financial management is crucial for the survival and growth of any business. Its importance lies in its ability to:
- Ensure a timely and adequate supply of funds at a reasonable cost.
- Achieve optimum utilisation of funds, preventing waste and ensuring resources are used in the most profitable ventures.
- Maintain liquidity and solvency, ensuring the firm can meet its short-term and long-term obligations.
- Plan a balanced and safe capital structure that minimises risk and cost of capital.
- Ultimately, increase the overall value of the firm by achieving the objective of wealth maximisation.
7. How does sound financial planning help a company avoid business shocks and surprises?
Sound financial planning acts as a financial blueprint that helps a company anticipate its future requirements for funds. By forecasting cash flows and needs, it ensures that the firm does not raise funds unnecessarily or face an unexpected shortage. This proactive approach allows the business to prepare for contingent situations, like a sudden drop in sales or a rise in raw material prices, thus providing financial stability and helping it absorb shocks without derailing its core operations.
8. What are the key functions that fall under the scope of financial management?
The scope of financial management is broad and includes several critical functions, such as:
- Estimating Capital Requirements: Forecasting the funds needed for future programs and expansion.
- Determining Capital Composition: Deciding the right mix of debt and equity in the capital structure.
- Choice of Sources of Funds: Selecting appropriate sources like shares, debentures, bank loans, etc.
- Investment of Funds: Allocating the raised funds into profitable ventures.
- Disposal of Surplus: Managing profits by deciding between dividend payouts and retained earnings.
- Management of Cash: Ensuring sufficient cash is available for day-to-day needs.
- Financial Control: Using tools like ratio analysis and budgeting to monitor performance and ensure financial discipline.
