The concept of “financial management” pertains to the oversight of an organization’s funds in order to ensure its viability and prosperity. This procedure comprises the coordination, strategizing, and oversight of the financial operations of an organization. The activities undertaken by an organization to evaluate its assets, cash flows, financing, and risk management are referred to as “financial management.” Because of this, organizations can attain their objectives and increase their revenue. In this article, we will discuss about goals of financial management in brief with examples for your better understanding.
Financial management’s fundamental objective is to assist an organization in accomplishing its goals through the most effective and efficient use of its funds. Financial management includes accounting for current assets and liabilities, forecasting future cash flows, selecting investments with an extended time horizon, establishing financial policies, and estimating the amount of capital required. An essential component of financial management entails the estimation of the required capital for a business. This will enable the organization to achieve both its present and future financial objectives.
Goals of Financial Management
For an organization to achieve financial success, proficient financial management is essential. Why? Due to the fact that financial management is essential to the operation of the company as a whole. Financial management is primarily concerned with establishing objectives for the use of the organization’s financial resources, both short-term and long-term. Accounting, risk management, investment opportunities, accounts payable and receivable, bookkeeping, and others are a few of the numerous specialized duties of banking administration systems. Here is an overview of goals of financial management with a detailed explanation for your convenience.
Incidental Costs
These expenditures consist of, among other analogous things, purchasing appliances, taking a vacation, repairing household items, or purchasing a vehicle or laptop. A considerable number of people maintain a reserve of cash on hand at all times, whether it be in a savings account or simply lying around the home. They exercise patience as they await a marginal increase in their modest savings prior to engaging in any purchases.
Budget Adaptability
Monthly, there will be a minor or significant adjustment to the budget. Consequently, a monthly evaluation should be performed. The budget for a family should be increased by Rs. 2,000/-the following month in the event that, for example, they exceed their anticipated expenditure on a particular item.
Profit Maximization
Optimal profitability ought to be the objective of every competent financial manager. Profit measures the difference between an organization’s revenue and expenses. Profits can increase by maximizing revenue and reducing expenses. There is also the option of reducing expenses while increasing revenue. You could even attempt to do both at once if you so desired. It is possible to maximize profits by putting suitable pricing and scalability strategies into practice. If raising prices doesn’t result in a decrease in demand, profit potential could be maximized. The simplest way to maximize profits is to take advantage of the price elasticity of demand, which allows customers to buy more goods. Your ability to reduce expenses is influenced by the input market, your degree of cost cognizance, and the manner in which costs fluctuate with volume. Some products are necessary for the optimization of our financial gains.
Revenue Optimization
In order to optimize earnings, an individual must execute prudent financial strategies and decisions that increase the amount of money earned while reducing superfluous expenditures. Selected assets are under the purview of executives and financial managers as their primary obligation. There should be viable, profitable initiatives, and those in charge of the funds should have the discernment to reject proposals that do not align with their objectives. Because the primary objective of every organization is to maximize profits, it is essential to recognize that this objective is currently under attack in the business world. The main reason for this is that individuals neglect to recognize the importance of quality, clarity, and time, among other factors.
Contingency Needs
Theft, natural disasters, unanticipated medical expenses, or unanticipated medical expenses are examples of such occurrences. Similar precautions must take for plan “A.” However, what occurd if “A” was not successful? A “B” plan should also be in place. Additionally, one should consistently seek opportunities to reduce expenses across various domains. Individuals have the ability to invest their money in stocks, mutual funds, real estate, insurance, and numerous other avenues.
Income Variation
The prospect of depleting one’s funds is highly probable, notwithstanding the constancy of the quantity acquired. Furthermore, it is possible to consume more cash than you earn. These two issues are, therefore, of the utmost importance to families undergoing periodic financial fluctuations. This circumstance arises when an individual’s revenue derive from sources other than wages, such as employment or a business. Consequently, it is essential to set aside a small amount of additional funds each month in the event that one’s expenditures surpass their income.
Shareholder Wealth
In order for a corporation to optimize its wealth, its management must execute strategic decisions that foster business expansion. The value of a business is determined by adding the cost of its debt to the mean market value of its shares. A fixed claim exists on the funds owed by an individual to a business. When an organization maximizes its wealth accumulation, it will experience an upward movement in its stock price. An increase in the value of stock signifies that shareholders will realize greater financial gains. The prioritization of this objective over the pursuit of maximum financial gain is a prevailing notion. This is due to a variety of factors, such as the advantages of a superior product, well-defined objectives, reduced conflicts that adversely affect proprietors’ interests, and more. This is the goals of financial management.
Allocation of Funds
Subsequently, an effort shall make to complete the financial evaluation reports. By utilizing your current income and an approximation of your prospective revenue, you are required to devise a strategy that will facilitate the achievement of all your objectives. Budgeting is the systematic arrangement of an individual’s reserves, income, and expenditures with the objective of promptly paying off debt by utilizing forthcoming revenues. There are several details that should never elude your attention when deliberating on financial management or the allocation of your paycheck.
Monthly Expenses
Indeed, that sums up the situation. It is the exclusive duty of an individual to maintain a monthly record of all invoices that are past due. Discretionary expenditures such as groceries, doctor visits, weekend excursions, elderly parent care, and similar costs ought to be enumerated alongside the primary charges. It is important to note that actual expenses, including other costs, will almost invariably surpass the budget. Therefore, augment the aggregate expenditure by 20% on a monthly basis. You may allocate this additional funds towards infrequently done activities, such as purchasing a surprise present for your loved ones, which occur every two to three months.
Financial Goals
This essay will educate us on the fundamental objectives of personal financial management, which include the aforementioned and more. Particular individuals possess distinct objectives with respect to their financial management, and this is due to the fact that everyone possesses a unique set of goals overall. In regards to money administration, however, there are a few fundamental objectives that everyone ought to pursue.
Future Planning
Numerous people have aspirations for the future, such as purchasing a home, financing their children’s college education, planning a wedding, and so forth. It is advisable to continue saving for these expenses, as certain ones, such as a house, are quite substantial. In general, the most advantageous places to invest one’s savings are in a variety of financial products, including insurance, real estate investments, bonds, stocks, mutual funds, and fixed accounts.
Long-term Plans
Priority should give to the financial objectives mentioned above at the end of the process of planning for retirement or old age. Do not place all of your financial eggs in the basket of your offspring. To that degree, it is not pleasant for anyone. Consequently, individuals’ retirement preparations naturally receive greater attention. These routine expenditures allocate towards a particular cash goal. The aforementioned values are of the utmost importance in light of the present circumstances (minimum achievable objectives). A highly effective piece of advice is to consistently strive for greater accomplishments than are necessary to achieve success.
Eps Maximization
Elimination of expenses in order to obtain the utmost amount of cash per share (EPS) is accomplished by dividing the total number of outstanding shares by the amount of EPS earned. Comparable benefits and expenses are associated with attaining this objective and maximizing earnings. The nature of the profit generated and the metric utilized for comparison are also explicitly stated. There are complications when the impact of dividend policy on value entirely disregard and maximizing earnings per share (EPS) may result in a decrease in value.
Cash Liquidity
In order to qualify as having liquid assets, a company must be able to promptly remit its short-term obligations. Much will depend on how far you are able to progress in this regard. The aforementioned factors comprise the current asset-to-current liability ratio, the maturity dates of current liabilities and assets, the nature and quantity of non-cash current assets, the assets at hand, and the rapport with short-term creditors, financiers, and other individuals facing comparable circumstances. In order to maintain a high level of liquidity, a business must satisfy several requirements, including a current ratio that is greater than the current amount, current assets and liabilities that have corresponding maturities, a well-balanced portfolio of current assets, assets capable of swift conversion into cash without depreciation, and creditors and bankers who are empathetic and supportive. Acquiring any of these items is not only arduous, but also prohibitively expensive and perilous.
What distance would constitute a rational target to aim for? While commendable in concept, this goal is imperfect in implementation. To ensure timely payment of expenses, it is imperative for a business to maintain a consistent revenue stream. A financial loss would ultimately result for the organization. An organization can capitalize on extraordinary opportunities if it possesses a significant financial reserve. There are numerous alternatives, including purchasing a large quantity of items at a discount, lending money to those in need at a time when interest rates are high, swiftly paying off small debts, and much more. An abundance of delightful occurrences transpire. However, circumstances in which cash resources are idle, as suggested by excessive liquidity, should avoid whenever possible. I absolutely see your argument. Having a substantial amount of currency on hand and generating income are two competing objectives that must coordinate.
FAQ
What are the Two Primary Aims of Financial Management
The primary objectives of financial management may vary depending on the context and organization. The objective of financial management is generally to maximize profits while minimizing losses. This is among the most important objectives of financial management. This is one way in which the company can ensure its long-term viability while continuing to provide the highest possible returns to its customers.
What are your Financial Ambitions in Life?
One could conceptualize a financial objective as an aim one holds for the purpose of managing one’s finances. This may involve savings, investment, expenditure, or production. Assigning a category to each of your financial objectives constitutes the initial stage in the budgeting process. It is much simpler to make progress toward your objective when you have a distinct notion of what you desire.
What Factors Contribute to a Successful Financial Plan?
An intelligent financial plan can serve as a visual representation of one’s current financial condition, forthcoming revenue objectives, and the progress made towards achieving those goals. An all-inclusive financial plan should comprise pertinent financial information such as income, assets, liabilities, investments, and insurance.
Final Remarks
These objectives exemplify the financial management goals that discussed in the preceding chapter. Developing a budget and establishing goals are essential for maintaining financial control. However, adhering to the limit is considerably more critical. Significant levels of self-control and concentration require for this. An entire book could devote to the concepts that emerge from it. This is, in essence, the key to accomplishing your life objectives. Although anyone can establish financial objectives and devise strategies, it is solely through diligent execution that these goals are ultimately realized. By adhering to these principles, one should possess the capability to establish rational goals and proficiently accomplish them. We sincerely hope that you learned something new and found this tutorial on goals of financial management to be useful. For a deeper comprehension of elements of financial management, read more extensively.
