Objectives

The primary objective of financial management is to maximise the wealth of the shareholders. This is known as the wealth-maximisation concept. It is not about simply earning a profit; it is about increasing the value of the company for its owners.

The wealth of shareholders is measured by the market price of the company’s equity shares. Therefore, the objective of financial management can be restated as: maximise the current market price of the equity shares of the company.

Why is the market price of a share the right measure? Because the company’s funds belong to the shareholders. How those funds are invested and what return they earn directly determines the market value of the shares. If a financial decision adds value — meaning the benefit from the decision exceeds the cost involved — the market price of the equity share rises. If a decision destroys value, the share price falls.

This logic applies to every financial decision, big or small. For example, when deciding whether to invest in a new machine, the aim is to ensure that the benefits from that investment exceed its cost, so that some value addition takes place. Similarly, when raising finance, the aim is to reduce the cost of funds so that the net value addition is even higher.

All financial decisions — investment, financing, and working capital management — must be evaluated against this single yardstick: does this decision increase the market price of the equity share? The decision-maker must identify those avenues of investment, those modes of financing, and those ways of handling working capital that will ultimately lead to an increase in the share price. …