Meaning:
- Financial Management is
a specialised function of general management. It refers to management of
business funds. It is mainly concerned with raising of finance and its
effective utilization for achievement of goals of the organization.
Definition: -"financial Management is concerned
effective use of an important economic resource, namely capital funds."
A. Profit
Maximisation: -
Profit
Maximization is a basic
principle of any business activity. According to this principle, all functions
of business aim at profit. The principle of 'profit maximisation is a
traditional concept. It is based on assumption that 'profit is a tool of
measuring the success of business firm'. In simple words, the business firm
should undertake only such activities that increase profit. The business
activities which decrease profit should be avoided.
Profit
maximisation is considered to be the most important business objective because
of the following reasons:
1. It is difficult for business to survive
without profit.
2. Profit is a tool of measuring the success
of a business firm.
3. High level profitability results in better
returns (dividend) to the
shareholders.
4. High level profitability can generate
funds, which can be used for future expansion of business firm.
5. Profit maximisation has to be achieved for
socio-economic welfare.
B. Wealth
Maximization: - According to Prof. Solomon Ezra the ultimate goal of
financial management should be the maximisation of owners' wealth.
According
to him, maximisation of profit is unreal and half motive. The proper aim of
financial management is wealth maximisation of equity shareholders.
Wealth maximization is also known as
'value maximization'. It means maximising net present value of a firm.
The
focus of financial management is on wealth
maximization of its owners' i.e. suppliers of equity capital. The wealth of
shareholders is reflected in market value of the shares. So wealth maximisation
means the maximisation of market price of shares. The wealth of equity
shareholders is maximized only when market value of equity shares is maximized.
