FUNCTIONS AND

GOAL OF
FINANCIAL
MANAGEMENT
 Goal of Financial Management
• The goal of financial management is to maximize the current
value per share of the existing stock or ownership in a business
firm, or
• To maximize stockholders’ wealth
 Managerial Actions to Maximize Shareholder
Wealth
• The price of a firm’s stock depends on the cash flows paid to
shareholders, the timing of the cash flows, and their riskiness.
The level and riskiness of cash flows are affected by the financial
environment as well as by the investment, financing and dividend
policy decisions made by the financial managers.
 Stockholder Wealth Maximization and Social
Responsibility
• There have been a number of different, well-developed
viewpoints concerning what the primary financial objectives of
the business firm should be:
1. The owner’s perspective which hold that the only appropriate goal is to
maximize shareholder or owner’s wealth, and;
2. The stakeholders’ perspective which emphasizes social responsibility
over profitability
 Questions about Social Responsibility and
Business Ethics
• What would happen if one firm attempted to exercise costly
socially responsible programs but its competitors did not follow
suit?
• How does the goal of stock price maximization benefit society at
large?
• Is “being ethical” good for profits in the long run? In the short
run?
 Agency Relationships
• Stockholders versus Managers
• Ways to motivate managers to act in the best interest of
stockholders:
1. Properly structured managerial compensation
2. Direct intervention by stockholders
3. Threat of firing
4. Threat of takeovers
 Agency Relationships

• Stockholders (through Managers) versus Creditors

• Creditors have a claim on part of the firm’s earnings and they have a
claim on the firm’s assets in the event of bankruptcy
• To best serve the shareholders in the long run, managers must play fairly
with creditors
 Wealth Maximization VS Profit Maximization

Wealth Maximization Profit Maximization

Planning Duration Always pays for discretionary May elect not to pay for
expenditures discretionary expenditures
Risk Management Would work on risk mitigation Less likely to pay for hedges
Pricing Strategy Most likely to reduce prices Most likely to increase prices
Capacity planning Would spend heavily on Would spend just enough on
capacity for future sales capacity to handle existing
projections sales level
 Functions of Financial Management
Financial Manager Makes Decisions Involving

Analysis and Planning

Acquisitions of Utilization of
Funds Funds

Impact on Risk and

Return

Lead to Shareholder’s
Wealth Maximization

Affect the Market

Price of Common
Stock
 Board of Directors

Chairman of the Board and

Chief Executive Officer

President and Chief

Operations Officer

Vice President Marketing Vice President Finance Vice President Production

Treasurer Comtroller
Tax Manager
Cash Manage
Cost Accounting Manager
Capital Expenditure
Finance Accounting
Credit Manage Manager
Financial Planning Data Processing Manager