II.

THE GOAL OF FINANCIAL MANAGEMENT

Assuming that we confine ourselves to for-profit businesses, the goal of
financial management is to make money and add value for the owners. This goal, however, is a
little vague and a more precise definition is needed in order to have an objective basis for
making and evaluating financial decisions. The financial manager in a business enterprise must
make decision for the owners of the firm. He must act in the owner’s or shareholder’s best
interest by making decisions that increase the value of the firm or the value of the stock.

The appropriate goal for the financial manager can thus be stated as follows:

The goal of financial management is to maximize the current value per share of the
existing stock or ownership in a business firm.

The stated goal considers the fact that the shareholders in a firm are the residual owners.
By this, we mean that they are entitled only to what is left after employees, supplier, creditors
and anyone else with a legitimate claim are paid their due. If any of these groups go unpaid, the
shareholders or owners get nothing. So, if the shareholders are benefiting in the sense that the
residual portion is growing, it must be true that everyone else is being benefited too. Because
the goal of financial management is to maximize value of the share(s), there is a need to
learn how to identify investments, arrangements and distribute satisfactory amount of
dividends or share in the profits that favorably impact the value of the share(s).

Finally, our goal does not imply that the financial manager should take illegal or
unethical actions in the hope of increasing the value of the equity in the firm. The financial
manager should best serve the owners of the business by identifying goods and services that
add value to the firm because they are desired and valued in the free market place