Goal of Financial Management

Define and discuss the goal of financial management. What are the basic types of financial management decisions and the role of the financial manager?

“The goal of a financial manager is to maximize the market value of the existing owners’ equity”. (Ross, Westerfield and Jordan, 2011, p. vii)

This equity can be in the form of a stock for publicly traded companies or in the form of the value of the owner’s equity in the case of a private for-profit company.

The basic types of financial management decisions are capital budgeting, capital Structure and working capital.

-Capital budgeting is concern with the company’s long-term investments. Here the financial manager finds assets with a higher cash flow than the cost of cost to acquire them.

-Capital structure is concern with how the firm obtains the financing to support the long term investments. How much should the company borrow and which source would cost the least. Working capital management addresses the short-term capital of the company. This area involves items such as inventory and supplier invoices and cash on hand.

A financial manager is a decision maker. The need for managerial input and judgment should not be underestimated. (Ross, Westerfield and Jordan, 2011, p. vii)

Financial managers must make decisions to meet the goal of maximizing equity value. They measure success and make adjustments by by constantly analyzing the company’s financial statement.

The goal of financial management is to maximize the market value of the existing owners’ equity (Ross, Westerfield and Jordan, 2011, p. 11), which is the same as maximizing the market price per share. Financial management makes decisions for the stockholders; therefore a good decision is one that increases the value of the stock. Profit maximization does not state clear goals because it does not specify the timing. Increasing profit in the short-term leads to measures that are not desirable for the long-term profit maximization....