Main Objectives of Financial Management
FINANCIAL MANAGEMENT The main objectives of financial management are:- 1. Profit maximization : The main objective of financial management is profit maximization. The finance manager tries to earn maximum profits for the company in the short-term and the long-term. He cannot guarantee profits in the long term because of business uncertainties. However, a company can earn maximum profits even in the long-term, if:- i. The Finance manager takes proper financial decisions. ii. He uses the finance of the company properly. 2.
Wealth maximization : Wealth maximization (shareholders’ value maximization) is also a main objective of financial management. Wealth maximization means to earn maximum wealth for the shareholders. So, the finance manager tries to give a maximum dividend to the shareholders. He also tries to increase the market value of the shares. The market value of the shares is directly related to the performance of the company. Better the performance, higher is the market value of shares and vice-versa. So, the finance manager must try to maximise shareholder’s value. . Proper estimation of total financial requirements : Proper estimation of total financial requirements is a very important objective of financial management. The finance manager must estimate the total financial requirements of the company. He must find out how much finance is required to start and run the company. He must find out the fixed capital and working capital requirements of the company. His estimation must be correct. If not, there will be shortage or surplus of finance. Estimating the financial requirements is a very difficult job.
The finance manager must consider many factors, such as the type of technology used by company, number of employees employed, scale of operations, legal requirements, etc. 4. Proper mobilisation : Mobilisation (collection) of finance is an important objective of financial management. After estimating the financial requirements, the finance manager must decide about the sources of finance. He can collect finance from many sources such as shares, debentures, bank loans, etc. There must be a proper balance between owned finance and borrowed finance.
The company must borrow money at a low rate of interest. 5. Proper utilisation of finance : Proper utilisation of finance is an important objective of financial management. The finance manager must make optimum utilisation of finance. He must use the finance profitable. He must not waste the finance of the company. He must not invest the company’s finance in unprofitable projects. He must not block the company’s finance in inventories. He must have a short credit period. 6. Maintaining proper cash flow : Maintaining proper cash flow is a short-term objective of financial management.
The company must have a proper cash flow to pay the day-to-day expenses such as purchase of raw materials, payment of wages and salaries, rent, electricity bills, etc. If the company has a good cash flow, it can take advantage of many opportunities such as getting cash discounts on purchases, large-scale purchasing, giving credit to customers, etc. A healthy cash flow improves the chances of survival and success of the company. 7. Survival of company : Survival is the most important objective of financial management.
The company must survive in this competitive business world. The finance manager must be very careful while making financial decisions. One wrong decision can make the company sick, and it will close down. 8. Creating reserves : One of the objectives of financial management is to create reserves. The company must not distribute the full profit as a dividend to the shareholders. It must keep a part of it profit as reserves. Reserves can be used for future growth and expansion. It can also be used to face contingencies in the future. 9.
Proper coordination : Financial management must try to have proper coordination between the finance department and other departments of the company. 10. Create goodwill : Financial management must try to create goodwill for the company. It must improve the image and reputation of the company. Goodwill helps the company to survive in the short-term and succeed in the long-term. It also helps the company during bad times. 11. Increase efficiency : Financial management also tries to increase the efficiency of all the departments of the company.
Proper distribution of finance to all the departments will increase the efficiency of the entire company. 12. Financial discipline : Financial management also tries to create a financial discipline. Financial discipline means:- i. To invest finance only in productive areas. This will bring high returns (profits) to the company. ii. To avoid wastage and misuse of finance. 13. Reduce cost of capital : Financial management tries to reduce the cost of capital. That is, it tries to borrow money at a low rate of interest.
The finance manager must plan the capital structure in such a way that the cost of capital it minimised. 14. Reduce operating risks : Financial management also tries to reduce the operating risks. There are many risks and uncertainties in a business. The finance manager must take steps to reduce these risks. He must avoid high-risk projects. He must also take proper insurance. 15. Prepare capital structure : Financial management also prepares the capital structure. It decides the ratio between owned finance and borrowed finance. It brings a proper balance between the different sources of. apital. This balance is necessary for liquidity, economy, flexibility and stability. How are financial market and financial services regulated in India? In this context briefly examine the role of SEBI? Financial regulators in India have been obligated to inter alia undertake the development of the market. This has been expressively incorporated in the Securities and Exchange Board of India (Sebi) Act, Insurance Regulatory and Development Authority (Irda) Act, and is proposed in the Pension Fund Regulatory and Development Authority Bill (PFRDA) since reintroduced in the Rajya Sabha.
The Reserve Bank of India (RBI), until the constitution of sector regulators like Sebi, Irda, etc, undertook the responsibility of developing various segments of the financial market. Setting up of institutions like the Industrial Development Bank of India ( IDBI), Unit Trust of India (UTI), National Housing Bank (NHB) and National Bank for Agriculture and Rural Development ( Nabard) and so on, establishes historical track of the role played by the RBI in the development of the financial markets.
At the conclusion of my presentation as Sebi chairman in one of the Neemrana Conferences; an annual event jointly organised by the National Council of Applied Economic Research (NCAER) and the National Bureau of Economic Research (NBER), US, Martin Feldstein, the then-chairman of NBER, asked me how could Indian capital market undergo so many fast-paced reforms (after the 2001 market scam), and was visibly surprised to hear that Sebi has been legislatively obligated to develop the market as well and eventually became the driver of development.
Market and its constituents were persuaded, albeit compelled, to march along the route charted out by the regulator. Here, it might be worthwhile to reflect on the growth and development of the insurance, asset management and pension markets, which has been stagnating for the last three years. The market participants in all the sectors bemoan that the growth has been torpedoed by the fast-paced regulatory changes ushered in by the concerned regulators.
The regulatory authorities, on the other hand, profess that the regulatory changes were warranted to protect the interest of the investors. It has also been argued, on occasions, that the environment and functioning of the market necessitated the changes to prevent possible scam and/or the market collapse. However, it appears significant part of the reform’s inspiration has been drawn from the practices in the developed markets and even thelocalisation, albeit customisation, has not been woven in some of the areas.
The questions that prominently surface are: (a) whether regulatory changes have helped or adversely impacted the growth and development of the market, and (b) whether investors’ interests have actually been protected. Answers to these questions would require putting the ethos of the market in perspective. There is no gainsaying that financial illiteracy is rampant in the country. The malaise is not limited to rural and/or the illiterate masses. Low level of understanding of financial products and lack of self-propelled actualisation to buy is widespread even among the educated elite in metropolitan towns.
Groping deeper in the basket of reforms reveals that sudden and drastic reduction or elimination of intermediation fees seems to have had lethal impact on the existence and sustainability of the intermediaries’ structure — both tied and third party. Some have gone out of business — the number of insurance agents has gone down by over three lakh during the last year alone — and quite a few others are on brink of disengagement. The imposition of the regulatory direction of customer paying the fees for the advice as against the age-old practice of being woven in the pricing could not be absorbed.
This is just an example of what choked the growth of the mutual fund industry. Savings and disposable incomes are finding their way into the ‘gold rush’ notwithstanding prices going through the roof. Investment in gold does not add to the growth of economy, as it is a locked investment and very little leveraging is done. It is well understood that the regulator has to architect a framework that ensures efficient functioning of the market and protects investors’ interests. However, this has to be achieved without impacting the growth and development of the market, at least in medium-to-long term.
Contraction of growth in a developing economy has the potential of a double whammy. The economy does not get the required resources; impacting the GDP growth and rise in disposable incomes, culminating into deceleration of financial market with multiple cascading effects. The savers miss the opportunity of profiting from the potentials of the economy. In fact, it is customary in most developed markets to undertake a pre-study of the cost of regulatory changes with an evaluation of the benefits to judge the trade of between cost and benefits.
The level of development of financial markets suggests that it is time for Indian regulators to begin the practice of undertaking such an exercise before embarking upon designing and implementing the new regulatory regime. At this point in time when the economy needs to grow at a level higher than 8. 5%, the growth of the financial sectors, which is critical, has to be ensured. It is an accepted dictum that securing an aspired rate of GDP growth requires roughly four times that rate as investment. The financial services industry is the enabler.
A revisit of the regulatory craft is imminently desirable. Explain role of SEBI in regulating Indian Capital Market more deeply with following points: 1. Power to make rules for controlling stock exchange : SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock market. 2. To provide license to dealers and brokers : SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, then SEBI can also control to that product and its dealers.
One of main example is ULIPs case. SEBI said, ” It is just like mutual funds and all banks and financial and insurance companies who want to issue it, must take permission from SEBI. ” 3. To Stop fraud in Capital Market : SEBI has many powers for stopping fraud in capital market. – It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. – It can impose the penalties on capital market intermediaries if they involve in insider trading. 4.
To Control the Merge, Acquisition and Takeover the companies : Many big companies in India want to create monopoly in capital market. So, these companies buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is for development of business or to harm capital market. 5. To audit the performance of stock market : SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges. 6. To make new rules on carry – forward transactions : a.
Share trading transactions carry forward can not exceed 25% of broker’s total transactions. b. 90 day limit for carry forward. 7. To create relationship with ICAI : ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI for bringing more transparency in the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest. Moreover, investors of India can easily trust on audited financial reports.
After Satyam Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not. 8. Introduction of derivative contracts on Volatility Index : For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index, subject to the condition that; a. The underlying Volatility Index has a track record of at least one year. b. The Exchange has in place the appropriate risk management framework for such derivative contracts. 2.
Before introduction of such contracts, the Stock Exchanges shall submit the following: i. Contract specifications ii. Position and Exercise Limits iii. Margins iv. The economic purpose it is intended to serve v. Likely contribution to market development vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading. vii. The infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and viii. Details of settlement procedures & systems ix.
Details of back testing of the margin calculation for a period of one year considering a call and a put option on the underlying with a delta of 0. 25 & -0. 25 respectively and actual value of the underlying. 9. To Require report of Portfolio Management Activities : SEBI has also power to require report of portfolio management to check the capital market performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for demanding 10. To educate the investors : Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010 SEBI imposed workshop.