What Are the Goals of Financial Management?

What Are the Goals of Financial Management?
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  • 0:00 Managing Money
  • 1:14 Goals of Financial Management
  • 3:09 Effects of Profit Maximization
  • 5:21 Lesson Summary
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Lesson Transcript
Instructor: Ryan Hultzman
This lesson introduces the concept of financial management and defines the scope that companies use to manage their finances. It will also discuss the primary goal of financial management and the advantages and disadvantages of this goal.

Managing Money

Cash is king.

This phrase is popular in business circles because it's true. A company that is cash-poor is in serious trouble if it wants to remain in business. And some businesses have plenty of capital, or cash, but don't know how to effectively and efficiently use it to their advantage. All businesses, whether cash-rich or cash-poor, must accumulate and dispense capital to remain in business. If they fail to make wise decisions concerning the capital that they spend, it could have serious implications for their future.

Financial management refers to how a company manages its capital (money) in order to fulfill the goals of the company. Senior executives in a company are responsible for this function and are held responsible by shareholders and other investors as they manage the company's capital.

The scope of financial management can be summarized through three points. Each one plays an important part for senior executives as they manage the financial health of their company. These include:

  1. Estimation of capital requirements (how much money the company needs in the long run)
  2. Determination of capital structure (how the company's going to get the money it needs)
  3. Investment strategies that the company can use to make money through investments

Goals of Financial Management

The main goals of the business are always the senior executive's primary target for financial management. Although the business may have concrete goals that are part of a business plan, there are also other goals, sometimes unspoken, that senior executives may focus on as they manage the company's capital. One of these unspoken goals is profit maximization.

Profit maximization is the proverbial golden goose egg to shareholders and other investors. It means that the company is running operations and managing capital to ensure that the maximum amount of profit is made by the company. Senior executives feel pressure to ensure that shareholder value is constantly maximized and the victim in the end is the customer. Customers are shortchanged by companies as they cut corners regarding quality of products or services. This might save the company money now but will rear its ugly head down the road. In addition, employee health and safety may be compromised to save money. Other times, employees lose their jobs in the effort to reduce capital costs, which ultimately is all about maximizing profit. This chart illustrates a few of these concepts:

Operational Change Effect to Shareholders Effect to Employees Effect to Customers
Use cheaper parts during manufacturing Helps Hurts Both
Increase manufacturing speed Helps Hurts Both
Increase sale price of goods Helps Helps Hurts
Sell factory to another company who will close it down Helps Hurts Both
Move jobs to foreign country Helps Hurts Both

As you can see from the chart, the effects of profit maximization can help or hurt different groups of people. Sometimes it can both help and hurt these same groups. For example, if a company increases manufacturing speed, it will help the shareholder because the increased speed will produce more products that the company can sell, increasing sales and thus, profit. But, it will hurt employees because the increase in speed will negatively affect their health and may compromise safety, and it can both help or hurt customers. It will help them by making more of the products available for purchase; it will hurt them because injuries at the factory, reducing quality in order to increase speed, or regulatory and litigious results can slow down production and decrease the availability of products for purchase.

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