Finance, which is so important for business requires proper management in respect to its timely availability, proper use, with no idle or surplus funds. This all comes under the purview of financial management. Financial management is concerned with optimal procurement as well as usage of finance. It aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds.
Financial management is also concerned with the duties of the financial manager in a business firm. Financial management, thus, is mainly concerned with procurement of funds and effective usage of funds. For this, it has to:
(i) Identify various sources of finance in terms of risk and their cost.
(ii) Timely procurement of funds.
(iii) Funds so procured are to be invested in such a way that returns are greater than the cost of procurement.
(iv) Ensure sufficient availability of funds as well as check that funds are not lying idle. Thus, in nutshell, effective deployment of funds to be made.
The primary aim of financial management is to maximise shareholders’ wealth. This is because a company’s funds belong to the shareholders and the manner in which they are invested and the return earned by them determine their market value and price. The market price of equity shares increases, if the benefit from a decision exceeds the cost involved.
Thus, we can say that the objective of financial management is to maximise the current price of equity shares of the company or to maximise the wealth of owners, i.e. shareholders.
(ii) Secondary Objectives .
In order to achieve the primary objective of wealth maximisation, financial management should aim at the following objectives:
(a) Profit maximisation/effective utilisation of funds Funds should be deployed in such a way to ensure that benefits of an investment exceeds its cost.
(b) Availability of funds at reasonable costs To raise funds at minimum cost and minimum risk, through effective financing decision.
(c) Maintaining adequate liquidity To maintain financial liquidity and profitability, through working capital decision.
(d) Ensure safety of funds To ensure safety of funds by creating reserves, reinvestment of profits, etc.
(e) Avoiding idle finance Idle finance not only adds to the cost of funds but also encourages wasteful expenditure. Therefore, financial management avoids over capitalisation.