Financial management is the fundamental essence of any business that navigates things for survival and the industry’s prosperity. We will delve deeper into the discussions to find out the main goal of financial management.
Financial management is not a static discipline and keeps evolving and working in a changing landscape. Therefore, financial management processes and strategies should be innovative to remain effective.
As financial management lies in economic areas, we may classify it in many ways involving official, operative, and operational goals. Primarily, it is for maximization of return on investment, and market value per share are official plans for financial management.
In this article, we will cover the primary goal of financial management, explore the functions and dynamic nature of financial management, and ways to shape the business world, which are indispensable.
Financial management?
Financial management focuses on the significance of economic numbers, which sounds like financial management creating value and organizational agility. It may occur through the allocation of few resources among competing business opportunities.
To thrive in financial management, we must comprehend what multifaceted disciplines entail. It is an aid to the implementation and monitoring of business strategies, which may help achieve business objectives. Financial management may aim for valuation as well.
Finance is a term derived from economics, and the basic notion of economics is unlimited wants with limited resources. The fundamental business of economics is fulfilling individual or any business needs with limited available resources.
Finance is the lifeblood of business, and we can not imagine business functions without it. Finance plays a critical role in initiating any trade. Financial management is about the intricacies of a company’s finances to achieve its objectives. It comprises several crucial components, including:
- Budgeting
- Investment decisions
- Financial decisions
- Risk management
- Valuation
Budgeting
Financial management requires considerate budgeting. The industry must plan well to allocate the resources efficiently, ensuring every dollar spent contributes to the process.
Investment decisions
Financial management has the core responsibility of evaluating investment opportunities. The companies made financial decisions considering significant capital expenditures and the outcomes in the long run. Financial management evaluates various investments’ effects on the company’s financial health.
Financing decisions
Another pivotal function of financial management is choosing between debt and equity. It deals with all the financing sources as capital structures, which may affect a company’s risk profile and profitability.
Risk management
Within an organization, it is integral to identify, assess, and mitigate financial risks. Risk management includes everything from market situations, uncertain risks, currency fluctuation, and other interest rate volatility.
Valuation
Valuation is estimating the worth of something, which relies on the fundamental analysis of the business’s financial statements. The firm’s historical financial information will help to analyze the financial asset or liability.
The primary goal of financial management
The primitive goal of financial management is maximizing stakeholder wealth, which will guide the most financial decisions within a company. Additionally, the other important three goals are:
Official goals
Official goals are the general aim of any organization, which are maximization of return on investment and
Operative goals
Operative goals depict the primary work of any organization and then help in choice-making. It checks the expected return on investment, cost of capital, debt equity norms, etc., which we may specify their acceptable ranges and keep in view the official goals.
Operational goals
The operational goals of financial management are reasonably directed, quantitative, and verifiable.
We can relate the official goals at the top (top executives), operative goals at the middle (middle management), and operational goals at the bottom line.
Maximizing stakeholder wealth
A crucial financial management objective is maximizing profits, which represents the surplus of revenue over expenses. Profit highlights the excess of revenue after expenses are taken out. Increasing the income used for the costs or decreasing the expenditures by adjusting to the gain is how to maximize profits, add to the payment, and cut from the expenses simultaneously.
Pricing and scale strategies can result in the maximization of revenue. To optimize income to increase the price of items sold, assuming demand does not have a proportional scale and increase in quantity sold by exploitation of the elasticity of pricing of the demand factor.
Minimization of expenses depends on the inputs: variability of costs following volume, market conditions, and consciousness about the costs.
Balancing Profitability and Risk
Profit maximization is not favored. Car Limitations must be brought into consideration. The mindset of profit-making is clear. Several concepts of profit include gross profit, profit before and after tax, divisible profit, net profit, etc. Referring to profit must be clear.
Secondly, profit maximization in the long and short terms must be set out clearly. We can differentiate long-run and short-run profit orientations in nature, strategies, and emphasis.
Additionally, profit maximization doesn’t consider scale factors. The size of the business and level of the relation must seek out a connection; in any other way, the mature interpretation of performance and efficiency is impossible. Lastly, seek out profits for time factors.
Money value is eaten up by inflammation in inflation. The value of the rupee decreases over time. The time value of gain isn’t considered profit maximization.
Importance of financial management
- The degree of succession is increased by more significant profit; profit is a measure in business and is considered a success.
- The quantum of profit produced highlights performance efficiency; profit is also a performance measure.
- Profit is vital for the expansion and survival of any undertaking. Only a profitable business can afford to think about futuristic approaches. We may consider modernization, diversification, replacement, and equipment renewal in these businesses.
- The primary purpose of a business is profit. Acceptance of society is because of profit-making companies, and losing concern is considered a social burden. The poor business undertakings are a heavy burden to all involved. The criterion of profit brings out lesser operational inefficiency. Inefficiency cannot be concealed if profit is the criterion of efficiency.
- Profit-making is a highly desired social goal; it is not a sin if your means are honest.
Consideration and functions of financial management
Financial management is when a business has orientations towards the benefit of the principals and stakeholders, and wealth increases by paying it to dividends and increasing market value.
Maximizing stakeholder profit is paramount; for public companies, it is the stock price, and for private companies, it is the market value of the owner’s equity. Still, we will consider some broader goals regarding stakeholder’s interests.
- Profitability maximization
- Long-term sustainability
- Stakeholders interests
- Corporate social responsibility
Profitability maximization
Profit works as an absolute figure that conveys less yet conceals more, which should be related to sales, capacity utilization, production, or capital invested. We call relative profit profitability, which could be specific to its use, and the superiority is the profit maximization goal.
Profit is the most popular yet traditional goal of financial management. In economic terms, profit is an excess of revenues over the cost. The business considers profit a fuel that keeps the company active.
Long-term sustainability
For the long-term success of any business, we must focus on some sustainable financial practices, which may include responsible resource allocation and some ethical business conduct.
Stakeholder interests
Financial management has a clear connection with the interests of various stakeholders and is accountable for creating a positive corporate image. Stakeholders could be employees, customers, or even the community.
Corporate social responsibility
Companies are adopting socially responsible practices, which are in demand to align with societal and environmental concerns.
Strategies for financial management process
No business begins and runs for charity; therefore, the fundamental purpose of business is to earn profit. Profit is the motive behind every business, and people consider it a meter for success.
The business that earns profit can be managed without depending on promoters or the government. Financial management employs several strategies to achieve specific goals, and one may make financial planning by following these steps:
- Creation of an economic roadmap
- Investment decisions
- Evaluating investment opportunities
- Debt V/S equity financing
- Capital structure management
- Identifying and accessing financial risks
- Implementing risk management strategies
Creating a financial roadmap
Chart or set a clear course to achieve economic objectives. It directs with a proper mindset for budgeting financing decisions and investments.
Setting financial goals and objectives is instrumental in helping companies stay determined on their own measurable, specific, and time-bound plans.
Investment decision
Capital Budgeting: To evaluate the probability of long-term oriented investments, capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return ( IRR).
Evaluating investment opportunities
While considering new projects and acquisitions, diligence and thorough analysis are vital.
Financing Decisions
Debt V/S equity financing
The right choices of the mix of debt and equity affect the cost of capital and financial risk.
Capital structure management
Optimization of the debt-equity ratio to minimize the chances of financial risks is included in the management of capital structure.
Identifying and accessing financial risks
The start of risk management is the identification of potential risks, for example, market risks, operation risks, and credit risks.
Implement risk management strategies
After identifying risks, strategies are implemented to alleviate them, such as hedging against diversifying investments and currency fluctuations.
The role of technology in the financial management process
Everyone is well aware of the importance of technology in this digital age, as it plays a vital role in financial management. Businesses must adopt innovative ideas such as automation, data analytics, and artificial intelligence, which may help to process, analyze, and utilize data.
Technological advancements enable financial managers to make informed decisions by understanding the power of given data.
- AI-powered predictive analytics
- Blockchain and cryptocurrency
- Fintech integration
- Sustainable financial practices
AI-powered predictive analytics
Predictive analytics tools are in demand because they forecast financial trends and risks. These tools will allow organizations to address potential challenges efficiently and seize opportunities.
Blockchain and cryptocurrency
Traditional financial systems hold some value, but blockchain and cryptocurrency are disrupting them by offering new fundraising and transaction security avenues.
Fintech integration
Financial technology companies constantly strive to reshape the economic structure, and now they are using such innovative solutions for payments, lending, and investment.
Sustainable financial practices
We can not deny the importance of environmental, social, and governance in financial management. Companies prefer to integrate sustainability into their financial strategies.
ESG investing
Sustainable investing must align financial goals, which state some ethical and environmental considerations while attracting some socially conscious investors.
Carbon accounting
Calculating entirely without leaving any loopholes and reducing carbon footprints are integral for financial risk management and reporting.
Challenges while dealing with business financial management
Financial management comes up with financial matters for the practical significance of numbers and figures. However, maximizing stakeholders and market value are fundamental things for financial management.
Still, the path to effective financial management comes with many obstacles. Financial people need to navigate numerous challenges, such as:
- Market volatility
- Regulatory issues
- Technological advancements
- Evolving business environment
- Risk management
Market volatility
The global economy may undergo unexpected and rapid changes, which, of course, may explicitly affect the financial strategies and outcomes.
Regulatory issues
Any business must stay up to date with ever-evolving financial regulations. Keeping up with the latest information will ensure compliance with constant challenges. The regulatory landscape of finances remains in a continual state of flux.
International regulations
The businesses that operate across borders must navigate international regulations such as GDPR and FACTA.
Climate-related disclosures
In particular regions, it is mandatory to report on climate-related financial risks; therefore, they need to incorporate climate considerations into their strategies.
Technological advancements
Any business needs to embrace technology to excel in their field. However, they need to follow some concerns against cyberbullying as if there are loopholes that may lead to compromising financial data and assets.
Evolving business environment
Businesses usually evolve, and companies should adapt to new market dynamics and consumer preferences, which will help you excel well in the competitive landscape.
Risk management
As they evolve, we must always recognize financial risks, so businesses need sophisticated risk management strategies.
Cybersecurity
We can notice a significant increase in reliance on digital systems among businesses, and cybersecurity is the primary concern. The industry must invest in robust cybersecurity measures to save their financial data.
Geopolitical risks
The financial market has to deal with trade tensions, political instability, and even global events that can have lasting effects. So, one must keep a vigilant eye on financial markets and have insight for mitigating such risks.
Remote work and collaborations
After the outbreak of the COVID-19 pandemic, businesses, including financial management, have adopted the remote work trend. Collaborative tools and remote access to financial data are primitive.
- Data security
- Cloud-based financial management
Data security
If there is remote access to financial data, maintaining data security and privacy is essential.
Cloud-based financial management
Cloud technology assures real-time collaboration and secure financial data security and privacy access.
Conclusion
What is the main goal of financial management? Consequently, it maximizes shareholder wealth and is a foundation for making countless financial decisions. The primary purpose of financial management is to balance profitability with responsible financial practices with the broader interests of stakeholders and society.
In this interconnected and data-driven world, financial management strategies maximize stakeholder wealth, and all the transformations are to achieve this goal. Business financial management should remain alive and proactive, embracing innovation and responsible practices to navigate complexities successfully.
While describing the importance of financial management, one must understand that it comes with sound financial planning, investment strategies, risk management, and various financial decisions as businesses can navigate complicated financial functions.
While thriving business financial management strategies, there could be various challenges and uncertainties. Financial management is not a function that takes the business towards prosperity and longevity in an ever-evolving world.
The financial management processadapts to the changing business environment, as regulation, remote work, and other essential factors shape the evolution of financial management.
