Objectives of Financial Management Class 12 explains that what are the main objectives of financial management and proper allocation and utilization of funds help in the growth and expansion of any organization. A detailed explanation of the topic is given below, you can scroll down for that.
Explanation of the Main Objectives of Financial Management
Financial management is the process of managing the finances of the business. All finance comes with costs and risks associated with it. To minimize the cost and risk, financial management comes into play and it helps in the investment of the finance in the areas where the finance will get a higher return than the investment. Financial management is also important for the deployment of the right amount of finance at the right time and thus making sure the avoidance of shortage or excess finance.
Financial management helps in taking the decisions such as financial decisions, dividend decisions, and investing decisions. There are certain objectives of financial management Class 12 which are fulfilled while taking these decisions. They are as under:
Wealth maximisation among Objectives of Financial Management
The most important Objective of Financial Management Class 12 is wealth maximisation. This concept means to maximise the wealth of the shareholders by increasing the price or value of the shares. Shareholders are called the owners of the business because the company’s fund belongs to them. The price/value of the shares increases when the finance of the business is optimally invested and utilized. When the benefits of the investment exceed the cost of the business then the investment is worth it. Financial management helps in taking decisions regarding finance, investment, and dividend and thus adds value, thus increasing the price of the shares.
Profit maximisation
Every economic activity has the aim to earn profit. Similarly, every business concern also aims at earning profit from the investment made by them. Profit can be maximised only when a business concern is running efficiently and effectively. Although, due to the dynamic environment of the business, a financial manager cannot guarantee the profits he/she can try their best to maximise the profits in a given situation by taking the correct financial decisions, investing in the activity which yields maximum returns along with lower costs and try to maximise the dividends on the shares.
Correct estimation of financial requirements of the business
We can see the future, which is why; we need to plan for the future in advance. Correct estimation is to be made based on the facts, figures, and forecasts. The financial manager is responsible for the proper estimation of the requirement. If the estimation made by the manager is wrong, it may lead to excess or shortage of funds. Estimation is based on the type of activity, level of activity, past record of a similar kind of activity, competitor’s strategy, etc.
Proper collection among Objectives of Financial Management
When the estimation is made for the requirement of the finance, it becomes important to analyze different available sources of finance and thus properly collect the funds. There is not a single source of finance. Finance can be taken from the internal sources such as profit earned or retained earnings or from the external sources such as debentures, loans from the financial institutions or banks, trade credit, etc. collection of funds depends on various factors such as the cost involved, the risk associated and returns expected.
Proper utilization
A financial manager is responsible for the proper allocation of the funds acquired. The right amount of money needs to be allocated at the right activity so that optimal utilization of the funds can take place. It is important to avoid excess funds/ idle finance to reduce the cost. It is equally important to avoid the shortage of funds which may lead to delay in production or sales.
Survival of the company
Finance acts as the blood of the company and it becomes important to manage the finance so that company can survive. It is a competitive world, to deal with cutthroat competition it becomes important to manage the funds of the company in the best possible manner. Every company tries hard to perform different activities, what makes the difference, is the management of the company. Management is the key to surviving, growing, expand and diversifying.
Financial discipline among Objectives of Financial Management
Financial disciple simply means having control over your money. A financial disciple is required to reach the monetary goals of the business. Every business which invests the funds into the production areas and thus keeps a check on risk and cost involved is financially disciplined. Financial management is the activity that helps in avoiding the wastage and misuse of funds and helps in keeping aside the funds for the correct activity and helps in avoiding impulse spending.
Planning sound capital structure
Financial management is the process that helps in taking various decisions regarding finance, investment, and dividend. Capital structure planning is also involved in financial management. It involves the important decision which includes determining the composition of the owner’s fund and borrowed funds. The decisions involved in the capital structure directly aim at increasing the wealth of shareholders and this is the very aim of financial management.
Decision making among Objectives of Financial Management
One of the important Objective of Financial Management Class 12 is Decision making. Decision-making is an integral part of the management of business finance. It helps in taking decisions regarding the selection of the source of finance which includes the least risk and least cost along with taking care of the return expected. There are other three major decisions such as financial decisions (deciding the quantum of finance), investment decisions (how the funds are to be invested), and dividend decisions (how much is to be distributed to the shareholders and how much is to be retained).
All these objectives of financial management Class 12 ultimately are focused on value addition. This value addition is done for increasing the market value of the product. As shareholders are called the owners of the firm and they need to be paid in the form of dividends. Other objectives are equally important and each objective is interconnected to other objectives. such as having financial disciple will lead to proper utilization, mobilization, and utilization of the funds and thus help in profit maximization.
BST Chapter 9 – Financial Management
- Business Finance
- Objectives of Financial Management
- Financial Planning
- Financial decisions in Financial Management
- Capital Structure in Financial Management