Objectives of financial management

Financial management entails arranging, planning, and monitoring monetary resources for specific purposes. It is not merely the management of money but a strategic approach that enables financial stability for an individual or entity.

The objectives of financial management pave the way out of the volatile world of finance, thereby securing one’s future. Read on about financial management and its key individual and corporate development objectives.  

What is Financial Management?

Financial management encompasses a systematic and intentional approach to effectively managing one’s financial resources. This type of management involves effective planning, control, and resource management, all of which contribute to future economic stability and growth.

For businesses, this primarily includes profits, cash flow, and investment in growth opportunities. On a personal finance level, financial management refers to how one spends income to maximize savings and investments on the path toward financial independence and security.

Objectives of Financial Management

There are several objectives associated with financial management that govern the financial decisions of individuals and businesses:

1. Ensuring Liquidity

Liquidity is essential for paying short-term debt while maintaining long-term financial goals. In financial management, adequate liquidity means having cash or readily convertible assets sufficient to cover obligations as they come due. 

This objective ensures a high level of operational efficiency.

For businesses: They can pay their suppliers, employees, and creditors on time. 

For individuals: Liquidity ensures they can cover unexpected expenses or emergencies without debt.

2. Maximising Profitability

Profit maximisation focuses on increasing a business or individual’s net income. It is achieved through reducing CPS (cost per share) and optimising revenue streams. 

For businesses: Profitability is more than just generating revenue. To manage their earnings well, companies must manage costs, improve operational efficiency, and follow strategic pricing in the global market. 

For individuals: Income management, expense minimisation, and wise investment decisions ensure wealth increases over time.

3. Ensuring Cost Efficiency

Cost efficiency is attaining the minimum cost for a given output. It is one of the most vital objectives in a business’s financial management, directly impacting profitability and competitiveness. 

For businesses: Some ways to ensure cost efficiency are optimal resource allocation, bargaining better terms with suppliers, and implementing new technologies that cut costs. 

For individuals: Cost efficiency can be achieved by budgeting, curbing wasteful spending, and wisely purchasing value-for-money products.

4. Financial Stability

Financial stability means staying in a solid financial position or having a sound personal budget that can absorb economic downturns and unexpected events. It encompasses creating reserves, borrowing carefully, and building other sources of income.      

For businesses: Financial stability is the main way to ensure their ability to continue operations and invest in growth opportunities during crises. 

For individuals:The key is to have savings, insurance coverage, and an investment portfolio that promises a secure and assured return.

5. Risk Management

Risk management represents a crucial component of monetary asset management. This objective evaluates and mitigates operational, credit, market, liquidity, and other financial risks. 

For businesses: To manage their risks competently, businesses must develop action plans to avoid or mitigate potential losses. For example, they can diversify their investment portfolio, buy insurance, or reserve monetary funds for emergencies. 

For individuals, Risk management is about preparing ways to get through difficult days. This can involve distributing investments in various sectors and placing aside money for unforeseen events. This helps individuals protect their assets and achieve long-term financial success. 

6. Capital Structure Optimisation

Capital structure optimisation means selecting the best combination of debt and equity financing. The overall objective is to ultimately provide the maximum benefits for shareholders at the lowest possible cost of capital. 

For businesses: A well-optimised capital structure is a risk-and-profit-sharing tool, giving companies ample financial flexibility to invest in growth opportunities. 

For individuals: Understanding the debt and equity components in personal loans, mortgages, and investments can help select better alternatives.

7. Investment Decisions

Investment choices are crucial in financial management because they determine how funds will be allocated across multiple projects or financial instruments. These decisions depend on expected profits and whether the project fits into the long-term plan.

For businesses: Feasibility analysis can be carried out at different levels to determine whether the project is economically sustainable. This includes a Base case, Net Present Value (NPV), Internal Rate of Return (IRR), and payback period, amongst other things.

For Individuals: Investment choices require identifying the right combination of assets, such as stocks and real estate. This enables them to meet their objectives promptly.

8. Dividend Policy Management

Dividend policy management refers to choices about sharing profits with shareholders. On the other hand, this part of managing finances tries to find a harmony between giving returns so as not to be labeled an irresponsible shareholder investor and the necessity of investing earnings in growth.

For businesses: An appropriate dividend policy maintains investor confidence and provides a steady income stream for shareholders. 

For individuals: The knowledge of dividend policies can influence investment choices and income strategies.

9. Working Capital Management

Working capital management is one of the most important elements that helps a company meet its short-term liabilities by controlling and regulating cash, inventories receivables, and payables.

Combining everything is known as working capital management, a concoction of optimised cash flow, promising returns in inventory turnover, and balanced receivables and payables. 

For businesses: Efficient working capital management ensures companies have sufficient liquidity to operate seamlessly and forestall insolvency.

For individuals: Working capital management means budgeting for monthly costs and having a rainy day buffer.

10. Wealth Maximisation

Wealth maximisation is a broader concept than profit maximisation. It is intended to enhance the entire value of a business or an individual’s financial assets. This can be done through long-term planning, investment in economic projects, and the adoption of sustainable development practices.

For businesses: Wealth maximisation gives stockholders a fair return on the company’s return on investment.

For individuals: Careful investment and financial planning increase wealth, thus ensuring a secure and stress-free retirement life.

11. Financial Planning and Forecasting

Financial management depends on financial planning and forecasting. Its objective is to set financial goals, plan budgets, and predict future economic performance.  

For businesses: Accurate financial forecasting helps foresee future financial requirements, evaluate potential risks, and make the right decisions. It also aids resource allocation, ensuring funds are available for important investments and expenditures.

For individuals: It helps them set their financial goals and budget and consider future financial requirements. By predicting income and expenses, individuals can move resources accurately and make rational economic decisions.  

12. Corporate Governance and Ethical Practises

Financial management cannot be complete without corporate governance and ethical practices. These practices hold the financial house accountable and ensure the proper flow of funds, the observance of regulations, and ethical principles in financial transactions.

These components of corporate governance in enterprises include fulfilling regulatory standards, keeping clean and accurate financial records, and providing a moral foundation for the organisation’s members. 

For businesses: The benefit of governance is building the trust of enabled investors, clients, and stakeholders so that the company can have a good reputation and be successful in the long term. 

For individuals: Ethical financial management involves truthful reporting, proper borrowing, and fair dealing in all financial transactions. 

Conclusion 

Financial stability, growth, and long-term success will not be possible without a thorough understanding of financial management’s objectives. Whether one deals with the personal aspect of finance or runs a business, these objectives guide strategic decisions.

Integrate them with the latest financial management techniques to get through your financial problems prudently and profitably.