Goals of Financial Management

Goals of Financial Management
Goals of Financial Management

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A company must satisfy its customers in order to succeed. A company also needs to sell products and services at a profit. (Non-profit and public organizations are not covered in this course.)

Companies have both tangible and intangible assets and need both of these types.

Goals of Financial Management

Should financial managers focus only on long-term sustainable value or should they account for the short-term demands of shareholders seeking immediate gain? Let us look at an example. A relatively new company without actual profits or a solid business strategy called V.A. Linux (ticker symbol LNUX) went public December 9,1999, at an initial price of $30 per share, and its stock hit $320 per share the same day. In the year 2000, its stock hit a low of 6.

There are numerous stories just like V.A. Linux. In general, maximizing value is a short-term proposition and one that does not always fit every situation in the short term.

Working to maximize shareholder wealth is a simple and obvious management mandate. Complications surface when managers try to balance short-term and long-term goals, sustainable performance, social responsibility expectations, ethical and legal behavior, and sometimes personal objectives. This course will touch on all of these complicating factors.

Goals of Financial Management

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Financial Environment

Financial managers are not independent operators. Financial institutions make their decisions in larger financial environments.

Financial managers need to understand the environment within which their businesses operate. You will look at the markets in which capital is raised and securities are traded and priced, and you will examine institutions that operate in these markets. In the process, you will also explore the principal factors that determine the level of interest rates.

People and organizations with borrowing needs often use the services of different financial intermediaries. This involves analyzing different existing types of financial markets such as primary and secondary markets, equity and bond markets, money markets and capital markets, and some of the recent trends in the financial markets.

It is important to consider different financial intermediaries, which not only efficiently transfer money between borrowers and savers, but essentially create new financial products. There are major types of intermediaries with highly specialized functions in our financial environment.

Goals of Financial Management

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Financial Statement Analysis

There are four basic financial statements: the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows. These statements contain a lot of information that should be dissected and analyzed to help managers to draw conclusions regarding the overall financial performance of the company.

Ratio Analysis

It is useful to anticipate future conditions and to plan actions that will improve a firm’s future performance. The primary method used to analyze financial statements is ratio analysis. The most important ratios to analyze can be grouped into liquidity ratios, asset management ratios, debt management ratios, profitability ratios, and market value ratios.

Financial Statement Forecasting Techniques

This assessment will focus on some of the techniques used to forecast financial statements as a critical part of the overall financial planning process. Financial forecasting usually starts with a forecast of the firm’s projected sales based on projected or pro forma financial statements. These statements can also provide ratios to be used in evaluating alternative business plans and strategies. Consider the uses and limitations of the additional funds needed (AFN) formula, which is used to estimate additional funds needed to support a higher projected level of sales, as well as the need for a comprehensive approach to forecasting and an understanding of financial and non-financial factors in the financial environment.

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  • Assets.
  • Goals of financial management.
  • Financial environment.
  • Financial statement analysis.
  • Ratio analysis.
  • Financial statement forecasting techniques.

Question to Consider

To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

  • Examine a large department store company that has stable sales and a well-established product line (for example, Macy’s). Imagine the following: The store does not foresee growth in future sales, and the company’s target markets are primarily in the United States. If this company plans to move product overseas at a lower cost, what financial and social factors should they be concerned with?
Library Resources
  • Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage.

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