1.0 Critically evaluate the main objective of financial management.

Why this objective

is the main objective. Critically evaluate other objectives of a company apart from
the main objective.

Woodruff, J. (2019) once said that a business cannot survive if it does not have good financial
management. Financial management signifies the financing operations are in planned,
organized, directed, and controlled. The financing operations are like purchasing and buying,
and utilization of the business’s wealth, in a way meaning that general management
principles are implemented to the business’s financial activities (Relivingmbadays, 2013).

In general, as mentioned earlier, financial management is relevant to the procurement,

arrangement, and monitoring of financial operations of an organization. There are some
objectives that are related to it. However, the main objective of financial management is to
optimize the wealth of a business, especially in maximizing the shareholder's wealth. To
clarify this, we know that the major purpose of any financial activities is to make a profit as
none of the business does not want to earn a profit. Indeed, the evaluating approaches in
finding out the organization performance of the concern, so-called profit, is quite crucial in
order to maximize the wealth of a firm.

For instance, the finance manager will always try to get the best earnings for the company, no
matter in the short term or long term. Although he cannot ensure the profits in the long term
due to the uncertainties in a firm, a firm can still gain the best earnings during the long period
of time if these two strategies are managed properly. In particular, the finance manager
should be well evaluated before taking any financial decisions and well utilized of the
business financing.

Even though saying that optimizing the wealth of the shareholders is essential, howbeit
maximizing the wealth of the stakeholders also important, just that its main duty is focusing
on the shareholders. There are some reasons to clarify on this point. Firstly, shareholders are
one of the parties that provide substantial amounts of funds so they should be the main
concern. Secondly, the firm is owned by them, hence they should get the money beforehand.
Thirdly, they take a substantial risk as whenever the firm becomes insolvent, they are the one
who lost the most in it. Fourthly, it will make it easy for the managers to make decisions by
putting attention completely on the shareholder's wealth maximization as this will be one
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clear goal for them to target. Thereby, shareholders wealth maximization should be
concentrated at first.

Anyway, financial management is much complicated because of the involvement of a number

of stakeholders, which comprised of the owners, the creditors, and other parties in the
financial markets. Figure 1.1 has clearly shown it. Therefore, effective purchasing and
buying, as well as the use of funding efficiently, will result in adequate utilization of funding
by the organization concern. Hence, the financial manager is taking a crucial part in financial
management.

Figure 1.1: Management of the Firm

Besides that, there are some other objectives of financial management of a company apart
from the main objective such as proper estimation of total financial requirements, achieve a
target market share, survival of a company, proper utilization of finance, maintain proper
cash flow, and create reserves.

The finance manager must estimate the total financial requirements of the firm properly by
finding out the amount of capital needed to start and run the organization. Besides that, he
needs to determine the fixed capital and working capital that are required by a firm.
Certainly, his estimation has to be no mistake, or else a shortage in finance will occur.
However, this is not an easy job for the finance manager as there are many factors need to be

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concerned. For instance, operations’ scale, amount of the employees hired, type of the
technology used by firm, legal requirements, etc.

Moreover, achieving a target market share is important too. Many studies have made a
conclusion that having a high market share can make high profits. One of the examples for
this study is the Profit Impact on Market Study (PIMS) where it mentioned that the reliance
of this approach on the concepts and measurements similar to market share performance and
marketing expenditures appears to be fitting best in the small business marginal (Manuseto
Ventures, 2018). In spite of everything, proceed the market share without bothering the
profits is not a good way as it may lead to bad occurrences.

On the other hand, there are conditions where the dominant objective of a company becomes
survival. In order for the company to survive in this competitive business world, the finance
manager must be cautious while making any financial decisions. A company may close down
because of a wrong decision made by a finance manager. In addition, severe economic or
market shock may stress a financial manager to fully concentrating on short term problems to
make sure the development of the firm. No matter how this is not enough in a long period of
time.

Furthermore, proper utilization of finance is even crucial for the finance manager to work on
it. He must profitably use finance but not wasting the company’s finance. For example, he
should not invest the finance of the company in the unprofitable projects that might lead to
bankruptcy. Similarly, he must not block the finance of the company in the account so the
company has enough liquidity. Apart from that, the funds need to be utilized in the greatest
possible way at least expenses once they are obtained (Management Study Guide, 2019).

Other than that, maintaining good cash flow is a short term objective of financial
management. To explain this, the firm needs to have a proper cash flow to handle the day-to-
day expenses like raw materials purchasing, salaries and wages payment, rent, electricity
bills, etc. Therefore, if the company has a good cash flow, it can take advantage of many
opportunities such as getting cash discounts on purchases, purchases on large-scale, giving
credit to customers, etc. This is because healthy cash flow will enhance the chances of
survival and success of the firm.

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Over and above, create reserves is part of the objectives of financial management. The
organization shall not distribute the full profit as a dividend to the shareholders. A part of it
must keep as reserves for the reason that reserves can be used for company growth,
expansion, and some contingencies in the future.

In short, good financial management in a company will maximize the company’s wealth and
later bring profits to the firm as long as following the objectives as mentioned above.

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2.0 Pacific Bhd is seeking to raise RM5 million to invest in a new project. Critically
evaluate the factors to be considered in choosing between various sources of finance
and the advantages and disadvantages between each type of the long term and short
term sources of finance.

Pacific Bhd is seeking to raise RM5 million to invest in a new project. One of the factors to
be considered in choosing between various sources of finance is a business risk. Murphy, S.
(2017) said that the business risk is a significant element to premeditate and it is a reference
to the volatility of operating profits. If we are unable to meet the financial commitments
relating to that particular source of finance, we must think out what will happen. Body
corporations with highly volatile operating profit should prevent high levels of borrowing.
When it comes to picking suitable funding, we must combat to minimise the entire risk. The
higher the level of risk, the higher the rate of return we will be taken. High-risk ventures are
financed by equity finance so that there is no legal responsibility to pay equity dividend. If
we determine to depend heavily on borrowing as our primary source of funding, then we will
need to square up the effects of a high level of gearing on our future borrowing capacity.
High levels of gearing can increase our financial risk and also influence the earnings per
share (EPS). Determining the appropriate balance of equity and debt will be a major decision
when deciding the appropriate funding or capital structure of the business (Accaglobal.com,
n.d.).

Next, articles in Accaglobal.com (n.d.) have spoken out the other factor to be considered in
choosing between various sources of finance is the cost of finance. The sources of finance
must be ranked according to their capital costs because the cost of finance and its influence
on income will play an essential role in our financial decision. Debt finance is usually
cheaper than equity finance and it is safer from a lender’s point of view. Actually, it is best to
go with the choice of finance that the business can afford because our main objective is to
minimise the cost of finance and maximize the owner’s wealth. If the shareholders consider
that the additional borrowing increases the risk of bankruptcy, then they may postulate an
additional return as compensation for the risk. Compensation represents the increase in the
cost of equity. We also need to add on other costs of borrowing which are including
origination fees, interest rates, and broker’s fees. In the event of liquidation, debt finance
should be paid off before the equity. This applies debt becomes a safer investment than the
equity and the debt investors may demand a lower rate of return than the equity investors.
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Usually, the arrangement costs are lower on the debt finance than the equity finance unlike
the equity arrangement costs are also tax-deductible. It is indispensable to add up all of the
costs related to each source of finance before making a resolution.

At the same time, voting control is another factor that plays an important role while choosing
between various sources of finance. A large issue of additional shares will alter in a dilution
of the voting control against existing shareholders. A piece of ownership in the business
should be given effect to each investor and because of this, the business is accountable to
those shareholders. Investors will request input into the operations such as sitting on the
board of directors or receiving performance and operation reports. You need to provide the
investors with information that the business may have wished to keep hidden from the
competition and exhaustive explanations for the business resolutions. Proprietors who do not
want to lose control of their business, preferring to keep primary decision-making in their
own hands, will only premeditate equity financing up to a particular level. Once the loan is
paid back, your relationship with the lender calls off, while investors continue to have a say
in the company until they are bought out or the company is sold, or the corporation goes
public. The conclusion can be drawn that if the business owners hold over 50% of the equity,
they may be reluctant to sell new shares to outside investors as their voting control at the
AGM may be lost (Accaglobal.com, n.d.).

On the other hand, Jensen, K. (n.d.) once said that the business’s current level of operating
gearing is included as one of the factors to be considered. Operating gearing consults to the
ratio of a firm’s operating costs that are regulated as composed to a variable. Increasing the
ratio of fixed cost, increasing the level of operating gear. Corporations with higher operating
gearing incline to have fugitive operating profits. This is because the fixed costs remain the
same no matter the volume of sales. Thereby, if the sales volume becomes higher, the
operating profit will be increasing by a larger percentage. But if the sales volume becomes
lower, the operating profit will be decreasing by a larger percentage. Familiarly, it is a high-
risk guideline to combine both high financial gearing and operating gearing. In many service
trades, high operating gearing is collaborative where many operating costs are stable.

Shadunsky, A. (2017) said the advantage of the long-term sources finance is stability. Long-
term financing provides companies and individuals with a more stable debt management
instrument than short-term financing. Dissimilar with a few short-term sources of finance
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such as honour from a supplier which may be recalled at short realization due to lack of a
formal agreement, long-term financing is detailed in a formal contract and the payment by
instalment is either at a fixed rate or at a variable rate decided by the market. Long-term
financing allows borrowers to have more protection when budgeting for costs and expenses.
If the business owners have long-term financing instead, that means they have enough
stability and do not have the requirement to raise the funds for financing often as a
comparison to short-term financing. It also means that it is easier to project the corporation’s
earnings and cash flows. Short-term financing does not offer those benefits so the owners
have to constantly renegotiate the terms of the contracts.

Another advantage of the long-term sources of finance is having a low maintenance and
monitoring costs of capital. In antithesis to short-term financing such as proposal from a
supplier will change over time and postulates regular monitoring, long-term financing is
ordinary and structured. Even though long-term debt instruments require the business owners
to provide widespread information to the borrowers, when they are protected, they require
minimal retention. This cuts back the work hours claimed to keep the extend credit. Having
long-term sources of finance gives the business proprietors a better idea of their long-term
cost of capital. Because of this, the proprietors are able to make a better decision which
projects are worth carrying out or not. If the company don't have long-term financing, the
business’s cost of capital may alter with every negotiation of the terms. That may lead to
more chaos in wondering out which kind of profitability the owners are looking for in a latent
project (Shadunsky, A., 2017).

In the same way, Mr Shadunsky, A. (2017) also listed out that the disadvantages of the long
term sources of finance are higher interest rates. Once a proprietor is locked into a long-term
agreement, it may be difficult to get out of it. If the interest rate becomes lower, the business
owner will not be able to renegotiate how to settle the financial agreement. The proprietors
may setup their agreement in a way that they can prepay if the interest rates drop. For a long-
term financing agreement, the interest rates are usually higher than the rates for short terms
financing. A shorter-term has a lower risk to the lender, as it is easier to prognosis a lenders
financial status in the short term than it is to be sure the lender will have the means to fulfil
the loan payments. Another disadvantage of the long term sources of finance is caution. It
would not sagacious to take on so much debt that the shareholders barely making their

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monthly interest payments. If they are going to take on debt, take on a suitable amount of
debt, do not take too much and it will cause financial distress in the business.

When compared to the long-term financing, the advantage of the short term sources of
finance is lower interest rates. Short-term interest rates are normally lower than the long-term
interest rates. The proprietors pay less interest for short-term financing because of both the
lower interest rate and the shorter total time they are paying interest. Short-term loans often
can be faster to obtain because lenders buy lower insurance for small loans. These loans can
be used to plug cash shortages causing from unpredicted costs, sales shortfalls, seasonal
effects or other origins. Typically, the longer the proprietor owes the lender, the higher the
interest rates will be paid. However, with short-term financing, everything will be paid back
to the business proprietors within a shorter period which means the proprietors also pay less.
They will still save some money even if the interest rate is higher compared with the long-
term loans (Bank, E. and Donohoe, A., 2019).

In spite of that, Bank, E. and Donohoe, A. (2019) have brought an idea that the disadvantages
of the short-term sources of finance including it can be costly to pay for long-term projects
using short-term loans. One of the reasons is the long-term loan is locked in the current
interest rates. During ordinary economic times, interest rates become higher over time. If the
proprietors decide to use the short-term loans to finance a long-term project, they may have to
pay a higher interest rate with each loan, then it will be increasing the price of the project.
Another disadvantage of using short-term financing is that a company might be in worse
shape when the owner needs to renew the loan. Following the circumstances, the
shareholders might have to pay more for a higher interest rate. If the situation getting worse,
they would not be able to renew the loan at all. In a word, short-term sources of finance
fascinate higher interest rates and higher monthly instalment. The proprietors may end up
paying a significant amount of money every month compared to what they have to pay if they
are servicing a long-term loan since the business owners are financing the principal debt over
a shorter period.

Corporations always need fixed capital no matter it is long-term financing or short-term

financing. Definitely, there are firms that are focusing on expanding their working capital and
taking benefits of the credence given by the suppliers, then they collecting cash and make it
as a sale occurs. No matter what the business owners have decided to finance their business
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capital, it will still appear advantages and disadvantages for both the long-term and short-
term sources of finance. The owners should carefully investigate and understand the pros and
cons of each option, then they may figure out which option will fit them better.