Goal of financial management should be so articulated as to help achieve the objective of wealth maximization. Financial goals may be stated as maximization long term as well as short term profits and maximization risk. These goals imply that the finance manager should take financial decisions in such way as to ensure high level of profits. He should also seek courses of action that avoid unnecessary risk and anticipate problem areas and ways of overcoming difficulties.
In the pursuit of the above goals finance manager should recognize the interrelationship between profit and risk .In fact, value of a firm is influenced jointly by return and risk. In real ward, the relationship between the two is inverse. The prime responsibility of the finance manager to strike judicious balance between return and risk in order to maximize value of the firm. To assure maximum profit to the firm the finance manager must monitor the cash inflows and outflows of the business and thereby ensure effective utilization of resources so as to deal with uncertainty. He has to gain flexibility by identifying strategic alternatives both in regard to investment outlets and acquisition of funds.
Another major financial goal of a firm is imparting sufficient liquidity and profitability of the enterprise. Thus, a finance manager while managing funds has to ensure that the firm has adequate liquid resources on hand to satisfy its obligation at all time and in addition it has a certain level above its expected needs to act as a reserve to meet emergencies. But if the firm carries large amount of funds in cash, it losses opportunity cost of the funds and therefore, goal of high level of profit suffers. A firm to improve its return must ensure optimum utilization of resources. Thus, the finance manager is in dilemma. The dilemma is high profitability means low liquidity and vice-verse. He must, therefore strike satisfactory trade off between profitability and liquidity.
How is your “Financial Goal?”
