The financial management objectives can be broadly classified into two categories:
Basic Financial Management Objectives
Traditionally, the basic financial management objectives have been (1) Maintenance of liquid assets and (2) Maximisation of profitability of the firm. However, these days, there is a greater emphasis on (3) Shareholders’ wealth maximisation rather than on profit maximisation.
1. Maintenance of Liquid Assets: Financial Management Objectives
Financial management aims at maintenance of adequate liquid assets with the firm to meet its obligations at all times. However, investment in liquid assets has to be adequate – neither too low nor too excessive. The finance manager has to maintain a balance between liquidity and profitability.
2. Maximisation of Profit: Financial Management Objectives
“Profit maximisation” is a term which denotes the maximum profit to be earned by an organisation in a given time period. The profit maximisation goal implies that the investment, financing and dividend policy decision of the enterprise should be oriented to profit maximisation. The term “Profit” can be used in two senses – first, as the owner-oriented concept and the second, as the operational concept.
Profit as the owner-oriented concept refers to the amount of net profit, which goes in the form of the dividend to the shareholders. Profit as the operational concept means profitability, which is an indicator of the economic efficiency of the enterprise.
Profitability-maximization implies that the enterprise should select assets, projects and decisions that are profitable and reject the non-profitable ones. It is in this sense, that the term profit-maximization is used in financial management.
Merits of Profit-Maximization
(a) Best Criterion on Decision-making: The goal of profit-maximization is regarded as the best criterion of decision making as it provides a yardstick to judge the economic performance of the enterprises.
(b) Efficient Allocation of Resources: It leads to efficient allocation of scarce resources as they tend to be diverted to those uses which, in terms of profitability, are the most desirable.
(c) Optimum Utilisation: Optimum utilisation of the available resource is possible.
(d) Maximum Social Welfare: It ensures maximum social welfare in the form of a maximum dividend to shareholders, timely payment of creditors, higher wages, better quality and lower prices, more employment opportunities to the society and maximisation of capital to the owners.