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Question:

What are the main objectives of financial management? Briefly explain.

Answer:

The two main objectives of financial management are:

  1. Primary objective: The primary objective of financial management is maximization of shareholder’ wealth, which is achieved by increase in value of shares or the market price of the shares.

  2. Secondary objectives: In order to achieve the primary objective of wealth maximization, financial management should aim to the following objectives:

    1. Profit maximization/effective utilization of fund: Effective utilization of funds, by ensuring that benefits of an investment exceeds its cost.

    2. Availability of funds at reasonable costs: To raise funds at minimum cost and minimum risk, through effective financing decision.

    3. Ensure safety of funds: To ensure safety of funds by creating reserves, reinvesting profits etc.

    4. Maintaining adequate liquidity: To maintain financial liquidity and profitability through working capital decision.

    5. Avoiding idle finance: Idle finance not only adds to the cost of funds but also encourages wasteful expenditure. Therefore, financial management avoids over capitalization.


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