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Three Essential Goals of Financial Management
Before explaining the topic, let's understand what is meant by financial management.
Financial management is applying the relevant principles of management to different financial activities. It is both an art and a science of managing money to attain the desired objective of the firm or organization as a whole.
As we can see, the management term is attached to it, so we can say that it is a complete process of planning, organizing, controlling, and monitoring the various financial resources available in the organization to attain its specific objectives.
In business, it is the process of managing the company’s financial resources to generate its overall value. It's allocating the financial resources in the organization in such a way that the needs and demands of each sector of the business are easily fulfilled and catered to in an efficient and effective way.
It's an organic function of a business. There are responsive and dedicated departments in a business that takes care of financial management.
Role of financial management at the strategic and tactical levels
Strategic level − At this level, financial management deals with the forecasting of cash inflows and outflows so that business value can be nurtured.
Tactical level − At this level, management is all about how the different transactions are recorded, analyzed, and reported to the superior level of the organization as a whole.
Now quickly look at different goals of financial management
The major goals of financial management have been divided into three broad categories −
improving market share
This is one of the most conventional yet important goals of financial management. Every business on earth is established for the sole purpose of profit. It is one of the most basic goals of any organization. Any business needs it for its day-to-day activities or the planning of long-term goals too.
No organization runs for charity. Every species present in the organization aims to increase profit. The whole functional level of a business is designed in such a way that it can increase profit.
So let's define profit.
Profit is extra revenue over cost.
There are four types of profit that are discussed at an operational level in the organization.
They are −
PBT − profit before tax
PAT − profit after tax
EBIT − Earning before income and tax
EBITDA − Earnings before tax deduction and amortization
Profit can be maximized by the following three methods
Increasing the units sold
increasing the price of the products
Different firms try one or more of the above techniques for profit maximization. Other than the above, a firm can either invest, acquire, or expand its business to increase the profit of its organization.
It is one of the most popular and modern approaches to financial management. It is somehow superior to the profit maximization goal of a business. Now let's define it.
So wealth maximization is enhancing and growing the value of the business so that the value of the shares held by the stakeholders of the business is increased.
Now let's note the point that who are the stakeholders of the business. There are two types of stakeholders
Media and society
Board of directors
So basically, if wealth is maximized in a business, all of the above stakeholders benefit from that. So broadly, we can say that wealth maximization is increasing the market price of the shares or dividends so that every stakeholder is mutually beneficial. For example, let's say that the value of the share of any business is $100 now, and in another year its market price is $120. So this is wealth that is created and increased.
Now, look at the reasons why wealth maximization is more accepted than profit maximization
First of all, it takes into account the larger interests of the stakeholders.
The whole structure is not based on mere profit but on cash flows.
It is a long-term approach.
It takes into consideration the time value of money.
It considers the risk and uncertainty factors.
It helps higher levels of management to have strong and active dividend policies.
Improving market share
When we talk about the leading players in the FMCG sector, Nestle or ITC come to mind. Why do we remember these names because they are the leading players in the FMCG market? These are the most prominent players that are leading in the market. The same goes for JIO in the telecom sector and TATA in the steel sector.
Now let's define what is meant by "market share."
So "market share" means the fraction of sales when compared to other players in a similar market. It gives an idea of what the size of the company is in relation to its competitors in the market. So the idea is basic and simple: whoever will be the market leader will have the maximum market share in the relevant industry.
Now, when a business is a key player in the market, lots of investors keep an eye on it. They gather information about it from various sources, like annual reports, magazines, television, and newspapers.
The upward and downward movement in the market share indicates the actual position of a company. Growing markets fulfill the following wants of the company or business −
It increases revenue.
It decreases the competitor's competition so that the business can flourish.
It increases the economies of scale.
Now that we have understood how increasing the market value is relevant to the organization, So let's quickly know the important methods by which a business can increase the value of its market share
It can decrease the cost.
It can increase sales.
There are lots of advertisements and promotions.
It can work on efficiency.
New products can be introduced to the product line.
Continuous customization and standardization
Grasp customer loyalty and trust.
It can introduce new technologies.
It can work in the HR sector to retain talent.
It can do mergers and acquisitions.
The primary goal of financial management always used to be profit maximization, but considering the long-term approach, it has been replaced by wealth maximization, hence maximising market share.
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