Financial Management: Objectives, Business Nature, and Capital Needs
Financial Management: Objectives and Capital Needs
Acquiring Sufficient Funds: The primary objective of financial management is to arrange sufficient funds for the business as required. This involves assessing the financial needs of the enterprise and identifying suitable sources for raising capital. The sources should align with the business’s needs.
Proper Utilization of Funds: While raising funds is important, their effective utilization is crucial. Funds should be used to maximize benefits, ensuring returns exceed costs. Resources allocated to various operations should be used efficiently.
Increasing Profitability: Also known as profit maximization, a key objective of a business is to earn adequate profits. This allows for reasonable dividend payments and retaining earnings to address future uncertainties. Profit maximization means maximizing the firm’s income and earnings per share.
Wealth Maximization: Currently, the primary objective of financial management is wealth maximization. Wealth refers to shareholders’ wealth, reflected in the stock market price of their shares. Wealth maximization means maximizing the market price of the company’s equity shares. The overall objective is to provide maximum returns to owners on their investment, achievable when the capital invested increases over time. Maximizing wealth means maximizing the market value of investment in company shares.
Factors Influencing Fixed Capital Requirements
Nature of Business: The nature of the business significantly determines the fixed capital required. Service-based businesses, merchandising, commerce, and trade may need little fixed capital. Public utilities and industries manufacturing heavy and capital goods are likely to invest heavily in fixed assets.
Size of Business: The size of the business also affects long-term finance needs. Size can be measured by the scale of operations. Generally, larger operations require more long-term funds, and vice versa.
Type of Products: The type of products manufactured governs the amount of fixed capital. Companies manufacturing capital goods like motor vehicles, engines, and refrigerators need more fixed capital than those producing simple consumer items like powder, cream, toothpaste, and soaps.
Production Techniques: The production technique influences fixed capital requirements. Using sophisticated machinery requires a large investment in fixed capital. Simpler production methods require less.
Use of Outside Parts: A company manufacturing all parts of a product requires more fixed capital than one assembling parts manufactured by others.
Diversity of Production Lines: A company manufacturing and marketing multiple products needs more fixed capital than one engaged in manufacturing a single product. Thus, diversity affects fixed capital requirements.