Study Guides/Commerce/Objectives of Financial Management
Study Guide · Commerce

What are the Objectives of Financial Management?

In Class 12 Business Studies, Financial Management is the process of planning, organizing, and controlling the financial activities (funds) of an enterprise. But what is the ultimate goal of managing these finances? Let's look at the objectives.

Question (Click to Flip)

What is the primary objective of financial management?

Answer

The primary objective of financial management is 'Wealth Maximization', which means maximizing the wealth of the company's shareholders by increasing the market price of the company's shares.

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Key Facts

Primary Objective: Wealth Maximization (Increasing share prices for shareholders).

Secondary Objective: Profit Maximization.

Liquidity: Having enough cash to pay daily expenses.

The Primary Objective: Wealth Maximization

The ultimate, number one objective of financial management is Wealth Maximization (Maximizing Shareholders' Wealth).

  • What does it mean?: It means taking financial decisions that increase the current market value of the company's shares.
  • Why is it the primary goal?: Shareholders are the true owners of the company. If the price of the company's shares goes up in the stock market, the wealth of the owners automatically increases. This only happens when the company makes smart investments and pays good dividends.

Secondary Objectives

While wealth maximization is the final goal, financial management also focuses on these secondary objectives to keep the company running smoothly:

  1. Profit Maximization: The basic goal of any business is to earn maximum profits. However, chasing short-term profit by taking extremely high risks can destroy the company, which is why it is secondary to long-term wealth maximization.
  2. Ensuring Liquidity: Making sure the company always has enough liquid cash in hand to pay daily bills, employee salaries, and creditors on time.
  3. Optimum Utilization of Funds: Ensuring that the money raised by the company is not sitting idle and is invested in highly productive projects that yield good returns.

Questions and Answers

What is the primary objective of financial management?+

The primary objective of financial management is 'Wealth Maximization', which means maximizing the wealth of the company's shareholders by increasing the market price of the company's shares.

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