After reading this article you will learn about:- 1. Objectives of Financial Management 2. Scope of Financial Management 3. Functions.

Objectives of Financial Management:

The objectives of financial management are:

(a) Profit Maximisation:

The primary objective of organisation is to earn profits. The finance manager should undertake activities which maximise profits.


Though conceptually profit maximisation seems to be an appropriate objective of financial management, it suffers from the following limitations:

(i) It is a vague concept:

The term ‘profit’ is vague in meaning unless it is clear whether it is profit before tax or after tax, profit in absolute figures or profit as a return on investment, long-run profit or short-run profit.

(ii) It ignores the timing of benefits:


Profits received today and in future are treated at par. Profit of Rs. 1 lakh today and that earned after 10 years cannot be treated at par. The principle of ‘earlier the better’ should be followed as early profits can be reinvested to earn returns in future.

(iii) It ignores the quality of benefits:

Profit maximisation concept makes no difference between the certainty or uncertainty of profits earned during the business conditions of depression and boom. If project A gives a return of Rs. 10,000 during boom and NIL return during depression while another project gives a return of Rs.7,000 during boom and Rs. 3,000 during depression, profit maximisation concept treats both the projects at par but it should not actually be so. The project whose returns are spread during its life should be preferred to those whose returns are uncertain.

(b) Wealth maximisation:


Wealth maximisation evaluates a project on the basis of cash flows generated over its effective life rather than accounting profits. It takes note of both quantity and quality of benefits by discounting the future cash flows to present. It applies a discount rate that reflects both uncertainty and futurity of returns. The discounted cash flows are compared with the cost of project and if the difference is positive, the project is accepted, otherwise it is rejected.

Wealth = Present value of future cash flows (-) cost of the project

Scope of Financial Management:

There are two approaches to the scope of financial management:

(a) Traditional approach:


This approach was in force during the early nineties. It focused mainly on procurement of funds, through long-term sources (like financial institutions and capital markets), during the episodic events (incorporation, mergers, acquisitions etc.) of the corporate life.

It suffers from the following limitations:

(i) It aims at procurement of funds and not utilisation in different investment outlets.

(ii) It emphasises on long-term sources and ignores the short-term financial requirements of the organisations.


(iii) The requirement of long-term sources is also considered during the episodic events. The day-to-day requirement of funds is ignored.

(iv) It caters to financial requirements of the corporate sector only. Financial requirements of non-corporate sector are not looked into.

(b) Modern approach:

Limitations of the traditional approach were overcome in the modern approach to financial management. The focus in this approach is not only on requirement of funds but also its effective utilisation.


Three main areas of interest in the modern approach are:

(i) What should be the size of the firm and what is the total volume of funds committed to the firm and what should be the asset composition of the firm?

(ii) What are the available sources of finance?

(iii) How should the profits be distributed?

Functions of Financial Management:


The three elements highlight three important functions which are:

(a) Investment decision:

It deals with investment of funds for effective functioning of the firm. Decision to invest in long-term assets is known as capital budgeting decision and investment in short-term or current assets is known as working capital management.

(b) Financing decision:

It deals with various sources of finance which design its capital structure. The sources can be long-term or short-term; within the long-term sources, appropriate balance between debt and equity should be maintained.

(c) Dividend decision:


It decides the part of profits that should be retained and the part that should be distributed in the form of dividends.