Do you know the primary goal of financial management? If not then let me explain. Financial management is the planning, arranging, directing, and managing of a company’s financial activities, such as procurement and use of cash? It entails applying general management ideas to the company’s financial assets.
In these lessons, We will learn what is the primary goal of financial management—Valuation, Maximizing shareholders, Increasing market value, Limiting risk, Maximizing profits, Wealth maximization, etc.
So without wasting a single time, let’s start learning in detail.
The primary goal of Financial Management
Generating financial management strategies is crucial. Therefore, we will explore and grasp the budget, objectives, and goals of financial management in this e-learning.
A private company’s goals and objectives of the financial management system are not similar to the goal of financial planning for a sole proprietorship.
That’s why we will discuss what should be the aims of financial management indifferent prospects.
The goal of Financial Management for a sole proprietorship
The aim of a lone proprietor is to generate more money, which means he will have to pay more taxes. Hence the objective is not to reduce the owner’s tax burden.
Similarly, the purpose is to maximize the stock’s market value, not to reduce the reliance on fixed costs. Here are some considering primary goals for a sole proprietorship-
*Tax purpose
The objective of sole proprietorship financial management for tax reasons is to capture and arrange information regarding business activities to make filling out tax forms easier.
*Selling a sole proprietorship
If you decide to sell your single proprietorship, your financial records will be invaluable in allowing a potential buyer to assess its financial performance.
*Increasing the value
A sole proprietorship has a single owner, and the owner’s primary purpose is to raise the value of the money invested in the firm (also known as equity). Increasing the value is one of the primary objectives of financial managers.
Goals of Financial Management for small business
Effective financial statements require proactively preparing for the long-term success of your firm. Here are a few financial management objectives you may start working on right now to safeguard your company’s future-
*Making budget
The financial budget aims to forecast the company’s cash flow, discount rate, capital expenditures, and balance sheet line items, including assets, liabilities, and owner’s equity.
The firm produces the financial budget each year, along with all other budgets.
*Controlling cash flow
Having a good cash flow is not something that happens by accident. You’ll have to put forth some effort. To better regulate the input and outflow of cash collection, you must assess and manage your cash flow.
The Small Business Administration suggests conducting a cash flow analysis to ensure that you have enough cash on hand each month to pay your obligations for the next month.
*Understanding the risk
Business risk refers to the danger that a public company may not be able to meet its financial statements.
Risk in business refers to the possibility that a company’s or business plans may not come out as an anticipated financial decision, that it will miss its target, or that it will fail to reach its objectives.
the primary goal of Financial Management for an Organization
In every organization, the chief executive officers’ essential roles communicate the company’s financial goals as a concrete focus for its corporate business decision-making, purpose, and strategy.
Here is the primary goal of Financial management for an organization –
*Valuation
Do you know What Is the Purpose of a Business Valuation?
Business valuation refers to the process of determining the economic worth of a full firm or corporate unit.
The valuation principle is used by financial managers for several purposes. For example, selling value, establishing partner ownership, taxation, and even divorce procedures or company valuation can be used to evaluate the fair worth of a firm or organization and share outstanding data.
Let’s take a look at the five basic principles of valuation in a professional business organization –
•Profitability in the future
•Potential Risk
•Cash Flow
•Objectivity Versus Subjectivity: What’s the difference
•Determination and motivation
*Maximizing shareholder
According to the shareholder wealth maximization aim, management should attempt to maximize the current value of predicted future returns to the firm’s owners (i.e., shareholders).
These payments might be in the form of regular dividends or revenues from the sale of common shares.
*Increasing stock value
A way of determining the intrinsic value of a stock is stock valuation. However, unlike relative valuation, which considers the worth of similar firms, intrinsic valuation thinks of the capital of a company on its own.
The price-to-earnings (P/E) ratio is the most frequent method for determining a stock’s worth. The P/E ratio is calculated by dividing its stock price by its most recently reported earnings per share (EPS).
*Maximizing wealth without harming stakeholders
Stakeholders are those who are impacted by a company’s actions. Stakeholders might be internal or external to the company, and some will be directly involved in commercial transactions while others will not.
The concept of stakeholder is linked to the notion of corporate governance. Regulatory and market systems are involved in corporate governance.
But do you know the difference between stakeholders and shareholders?
Well,
Shareholders own the company’s shares while stakeholders are a group interested in the company’s operations for reasons other than stock performance and who can influence or be influenced by it.
One objective of financial cost might be to increase value while minimizing harm to stakeholders or the many affected by the firm.
*Limiting risk
Risk management is the process of identifying, analyzing, and accepting or mitigating uncertainty in investment choices in the financial sector.
When it comes to risk management, financial and non-financial entities must be differentiated.
Investors and company managers can use a variety of techniques to deal with uncertainty. The most prevalent risk management techniques are Hedging, Diversification, Insurance, Operating Practices, and Deleveraging.
*Maximizing profit
What is profit maximization in financial management?
Profit maximization is the process or strategy for increasing profits Earnings Per Share (EPS) in financial management. In other words, all decisions, whether investment or finance, are made with the goal of increasing profits to maximum levels.
Why do all shareholders agree on the same goal for the financial manager? Because Profit Maximization is a traditional and restricted way to maximizing an organization’s profit.
Profit maximization seeks to make a significant profit, whereas wealth maximization seeks to attain the maximum market value for common shares.
Goals and objectives of financial management -Important MCQ and solutions
1. The primary goal of the financial management is to____________.
Ans: to maximize the wealth of owners.
2. Investment is the _______________.
Ans: employment of funds on assets to earn returns.
3. Financial Management is mainly concerned with ______________.
Ans: All aspects of acquiring and utilizing financial resources for the firm’s activities.
4. Profit maximization as a goal is not ideal because it does NOT directly consider_________________.
Ans: risk and cash flow.
5. the goal of financial management is to increase the___________.
Ans: Current market value per share.
6. the goal of wealth maximization for the owners makes sense for the firm because_____________.
Ans: If we have satisfied owners, we have satisfied all other parties as well.
7. the primary goal of the financial manager is to__________.
Ans: maximize the value of the firm to its owners.
8. the goal of the financial manager in a corporation where shares are publicly traded is to______________.
Ans: Measured by the share price of its stock.