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Objective of Financial Management

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Meghan Kaye Liwen
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20 views

Objective of Financial Management

Uploaded by

Meghan Kaye Liwen
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Objective of Financial Management

A. Profit maximization
B. Wealth Maximization

To achieve wealth maximization, the finance manager has to take careful decision in respect of:

1. Investment Decisions:
-These relate to the selection of assets which funds will be invested by a firm.
2. Financing Decision
-These relate to acquiring the optimum finance to meet financial objectives and seeing that
fixed and working capital is effectively managed.
3. Dividend Decision
-These relate to the determination as to how much and how frequently cash can be paid out
of the profits of an organization as income for its owners/shareholders.
4. Liquidity Decisions
-Current asset management is another important function that requires that current assets
should be managed efficiently to guard the firm against illiquidity. Lack of liquidity in
extreme situations can lead to insolvency. A high rate of investment in current assets would
provide liquidity but would lose profitability. This trade-off must be managed effectively.

Financial Management and Accounting


Accounting is an important input in financial decision-making or into the financial
management function. The information contained in financial statements and reports helps
financial managers in gauging the past performance and future directions of the
organization.

Decision-making
The purpose of accounting is to collect and present financial data on the past, present and
future operations of the organization. The financial manager uses these data for financial
decision making. Financial management begins where accounting ends.

TEN AXIOMS THAT FORM THE BASICS OF FINANCIAL MANAGEMENT


1. The risk-return trade-off
2. The time value of money
3. Cash flows-not profit-is King
4. Incremental Cash Flows
5. The curse of competitive markets
6. Efficient Capital Markets
7. The agency problem
8. Taxes bias business decisions
9. All risk are not equal and some cannot-Some risk can be diversified away
10.Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance
FINANCIAL STATEMENT ANALYSIS

 Process of identifying financial strengths and weaknesses of the firm by properly


establishing relationship between the items of the statement of financial position and
the profit and loss account.

TOOLS AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS:


1. Horizontal (Trend) Analysis
-Compares line items from one period with another period, to assess trends. Its purpose is
to determine the increase or decrease that has taken place, expressed as either an amount
or a percentage.

Increase/Decrease Method (For two accounting periods)


 Peso change= Amt .∈Comaprison year− Amt .∈ Base year

Peso Change
 %Change= ∗100
Amount ∈Base year

Trend Percentages or Index Numbers (For more than two years)

Amount∈Comaprison Year
 Trend %= 100∗¿
Amount ∈Base Year

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