Everyone has some plan on how they manage their money. The invest certain amount, spend some, put some in savings etc. Organizations also have to make similar decisions. This is Financial Management. Let us discuss some objectives of financial management.
Business Finance is the funds needed for carrying out business operations. Finance is a requirement to set up a business, to run it, to modernize, it to expand or diversify it. It is a vital activity in an organization. The activities concerned with the planning, raising controlling and administering money used in the business is Financial Management. It involves procurement of funds to buy Fixed assets (tangible and intangible) and Raw materials and maintain working capital.
According to B.O.Wheeler: “Financial Management includes those business activities that are concerned with acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise.”
Proper financial management will help firms to supply better product to its customers at lower prices, a pay higher salary to its employees and still provide a greater return to investors.
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Objectives of Financial Management
One of the main objectives of Financial Management is to maximize shareholder’s wealth, for which achievement of optimum capital structure and proper utilization of funds is very necessary. Be mindful that wealth maximization is different than profit maximization. Wealth maximization is a more holistic approach, aimed at the growth of the organization
To Ensure Availability of Funds
The sound financial condition of business is a must for any business to survive. The availability of funds at the proper time of need is an important objective of business. The organization will not be able to function without funds, and activities will come to a halt.
Attain Optimum Capital Structure
To maintain the optimum capital structure, a perfect combination of debentures and shares is a requirement. The organization will not want to give away too much equity, and also control the cost of capital. It is a delicate balance.
Effective Utilisation of Funds
Business not only needs a large number of funds but also skills to handle such large amounts. To cut down unnecessary costs and to save funds from wasting in useless assets is crucial for business. An example of such misuse of funds would be investing in extra raw material, in quantities not required.
Ensuring the Safety of Funds
The vital objective of financial management is to ensure the security of its funds through the creation of reserves. The chances of risk in investment should be minimum possible. Some of the reserves created for this purpose are Sinking Funds, General Reserves etc
Solved Question for You
Question: Explain Financial Management. What is effective utilization of funds?
Answer: Funds required for carrying out business operations is called Business Finance. Finance is a need to set up a business, to run it, to modernize, it to expand or diversify it. The activities concerned with the planning, raising controlling and administering money used in the business is Financial Management. Effective utilization of funds means to cut down unnecessary costs and to save funds from wasting on useless assets.