1.Profit
maximization : The main objective of financial management is profit
maximization. The finance manager tries to earn maximum profits for the company
in the short-term and the long-term. He cannot guarantee profits in the long
term because of business uncertainties. However, a company can earn maximum
profits even in the long-term, if:-
The
Finance manager takes proper financial decisions.
He
uses the finance of the company properly.
2.Wealth
maximization : Wealth maximization (shareholders' value maximization) is also a
main objective of financial management. Wealth maximization means to earn
maximum wealth for the shareholders. So, the finance manager tries to give a
maximum dividend to the shareholders. He also tries to increase the market
value of the shares. The market value of the shares is directly related to the
performance of the company. Better the performance, higher is the market value
of shares and vice-versa. So, the finance manager must try to maximise
shareholder's value.
3.Proper
estimation of total financial requirements : Proper estimation of total
financial requirements is a very important objective of financial management.
The finance manager must estimate the total financial requirements of the company.
He must find out how much finance is required to start and run the company. He
must find out the fixed capital and working capital requirements of the
company. His estimation must be correct. If not, there will be shortage or
surplus of finance. Estimating the financial requirements is a very difficult
job. The finance manager must consider many factors, such as the type of
technology used by company, number of employees employed, scale of operations,
legal requirements, etc.
4.Proper
mobilisation : Mobilisation (collection) of finance is an important objective
of financial management. After estimating the financial requirements, the
finance manager must decide about the sources of finance. He can collect
finance from many sources such as shares, debentures, bank loans, etc. There
must be a proper balance between owned finance and borrowed finance. The
company must borrow money at a low rate of interest.
5.Proper
utilisation of finance : Proper utilisation of finance is an important
objective of financial management. The finance manager must make optimum
utilisation of finance. He must use the finance profitable. He must not waste
the finance of the company. He must not invest the company's finance in
unprofitable projects. He must not block the company's finance in inventories.
He must have a short credit period.
6.Financial
discipline : Financial management also tries to create a financial discipline.
Financial discipline means:-
To
invest finance only in productive areas. This will bring high returns (profits)
to the company.To avoid wastage and misuse of finance.
7.Increase
efficiency : Financial management also tries to increase the efficiency of all
the departments of the company. Proper distribution of finance to all the
departments will increase the efficiency of the entire company.
8.Proper
coordination : Financial management must try to have proper coordination
between the finance department and other departments of the company.
The finance department of an enterprise performs several functions
in order to achieve the above objectives. The scope of finance function is very
wide. It consists of the following activities:
1.Estimatingthe Requirement of Funds
The finance department must estimate the capital requirements of the firm accurately for long term and short term needs. In estimating, the finance department must take help of the budgets of various activities of the business e.g. sales budget, production budget, expenses budget etc. In the initial stage, the estimate is done by promoters. Business is likely to run into difficulties due to excess or shortage of funds. Correct estimates ensure the availability of funds as and when they are needed. In estimating the requirement of funds, nature and size of the business, modernization and expansion plan should be given due consideration.
The finance department must estimate the capital requirements of the firm accurately for long term and short term needs. In estimating, the finance department must take help of the budgets of various activities of the business e.g. sales budget, production budget, expenses budget etc. In the initial stage, the estimate is done by promoters. Business is likely to run into difficulties due to excess or shortage of funds. Correct estimates ensure the availability of funds as and when they are needed. In estimating the requirement of funds, nature and size of the business, modernization and expansion plan should be given due consideration.
2.Determining the Capital Structure
capital structure mean the proportion of different securities for raising the required funds. Once the total requirements of funds are determined then take a decision regarding to the type of securities to be issued are taken. The finance department must determine the proper mix of debt and equity. It should also decide the ratio between long term and short term debts.
capital structure mean the proportion of different securities for raising the required funds. Once the total requirements of funds are determined then take a decision regarding to the type of securities to be issued are taken. The finance department must determine the proper mix of debt and equity. It should also decide the ratio between long term and short term debts.
3.Choice of Sources of Finance
A company can raise funds from different sources e.g. shareholders, debenture holders, banks, financial institutions, public deposits etc. Before raising the funds, it has to decide the source from which the funds are to be raised. The source of finance should be made very carefully by taking a number of factors into account such as cost of raising funds, conditions attached, charge on assets, burden of fixed charges, dilution of ownership and control etc.
A company can raise funds from different sources e.g. shareholders, debenture holders, banks, financial institutions, public deposits etc. Before raising the funds, it has to decide the source from which the funds are to be raised. The source of finance should be made very carefully by taking a number of factors into account such as cost of raising funds, conditions attached, charge on assets, burden of fixed charges, dilution of ownership and control etc.
4.Investment of Funds
The funds raised from different sources should be prudently invested in various assets -short term as well as long term to optimize the return on investment. In taking decisions for the investment of long term funds, a careful assessment of various alternatives should be made through capital budgeting, opportunity cost analysis and many other techniques used to evaluate the investment proposals..
The funds raised from different sources should be prudently invested in various assets -short term as well as long term to optimize the return on investment. In taking decisions for the investment of long term funds, a careful assessment of various alternatives should be made through capital budgeting, opportunity cost analysis and many other techniques used to evaluate the investment proposals..
5.Management of Cash
It is the prime responsibility of the finance manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. Cash is needed to purchase raw materials, pay off creditors, to pay to workers and to meet the day to day expenses of the business. Availability of cash is necessary to maintain liquidity and credit- worthiness of the business. Excess cash must be avoided as it costs money.
It is the prime responsibility of the finance manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. Cash is needed to purchase raw materials, pay off creditors, to pay to workers and to meet the day to day expenses of the business. Availability of cash is necessary to maintain liquidity and credit- worthiness of the business. Excess cash must be avoided as it costs money.
6.Disposal of Surplus
One of the prime function of the finance department is to allocate the surplus. After paying all taxes, the available surplus of the business can be allocated for three purposes -(a) for paying dividend to the shareholders as a return on their investment, (b) for distributing bonus to worker and company's contribution to other profit sharing plans, and (c) for ploughing back of profits for the expansion of business.
One of the prime function of the finance department is to allocate the surplus. After paying all taxes, the available surplus of the business can be allocated for three purposes -(a) for paying dividend to the shareholders as a return on their investment, (b) for distributing bonus to worker and company's contribution to other profit sharing plans, and (c) for ploughing back of profits for the expansion of business.
7.Financial Controls
The financial manager is under an obligation to check the financial performance of the funds invested in the business. There are a number of techniques to evaluate the performance viz. Return on Investment (ROI), budgetary control, cost control, internal audit, ratio analysis and break-even point analysis. The financial manager must lay emphasis on financial planning as well.
The financial manager is under an obligation to check the financial performance of the funds invested in the business. There are a number of techniques to evaluate the performance viz. Return on Investment (ROI), budgetary control, cost control, internal audit, ratio analysis and break-even point analysis. The financial manager must lay emphasis on financial planning as well.
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