Objectives of Financial Management

The main objective of financial management is to maximize the wealth of shareholders. The other important objectives of financial management are:

  1. To provide maximum returns to the owners on their investment.
  2. To ensure continuous availability of sufficient funds at reasonable cost.
  3. To ensure effective utilisation of funds.
  4. To ensure safety of funds.

Decisions Relating to Investment, Financing and Dividend

  1. Investment Decision: This decision involves careful selection of assets in which funds have to be invested. Decision relating to investment in fixed assets (capital budgeting) and decision relating to investment in current asset (working capital) are considered here. Investment decisions are influenced by cash flow, risk involved, technological changes, etc.

  2. Financing Decision: This decision relates to the proportion in which funds are raised from various sources. Factors like cost of fund, risk involved, control, cash flow etc. are considered before taking financial decision. In financing decision the firm has to decide the ratio of owned funds and borrowed funds. Owned funds consists of equity share capital, preference share capital and retained earnings. Borrowed funds include debentures, loans and public deposits, etc.

  3. Divided Decision: This decision is concerned with appropriation of earned profits. This profit of the firm can be retained in the business or can be distributed to the share holders as dividend. A company has to decide how much profits should be distributed as dividend and how much should be retained for future business growth. Factors affecting dividend decision are cash flow position, stability of earnings, growth opportunities, etc.