Finance Management or Financial Management

- is the strategic planning and managing of an individual or organization’s finances to better

align their financial status to their goals and objectives.

Purpose of Financial Management

- to guide businesses or individuals on financial decisions that affect financial stability
both now and in the future.

Types of Financial Management

1. Financing
- acquiring funds,managing debt, and assessing risk when borrowing money for purchases or to
build a company.
- raising capital

2. Investment
- choose where to invest, what to invest in, and how to invest.

3. Dividend
- create dividend disbursement plan and policy and implement it, that plan, suggest
modifications when needed, and monitor payouts if and when they occur.

Financial Management Cycle

1. Planning and Budgeting: Set financial goals and create a detailed budget outlining expected
revenues, expenses, and investments.
2. Resource Allocation: Allocate financial resources to different departments or projects based
on the budget and strategic priorities.
3. Operations and Monitoring: Implement financial plans, track actual performance against the
budget, and manage day-to-day financial activities.
4. Evaluation and Reporting: Assess financial performance, compare results with the budget,
and report findings to stakeholders to inform future planning.

Shareholder wealth maximization is the idea that the main goal of a business's managers
should be to increase its stock price as much as possible.

How Shareholder Wealth Maximization Works?

It is a principle of corporate governance that sets one primary goal for business managers.

Role of Business Managers

Why are business firms not seeking profit rather than an increase in share price?
- One reason is that profit maximization does not take the concepts of risk and reward into
account as shareholder maximization does. The goal of profit maximization is, at best, a
short-term goal of financial management.

Example of Maximizing Shareholder Wealth

- For instance, a company that governs itself under the guiding principle of creating a company
with unending intrinsic value would be maximizing its shareholders' wealth. That's because
every action it takes would be dedicated to increasing the share price, which makes the
company and its shares ever more valuable to those who invested in it. The goal of increasing
 stock price would supersede all other business goals, not to mention social and environmental
goals.

Ethics of Shareholder Wealth Maximization

- There is an idea that businesses focused on money are greedy and don't care about social
issues or that socially responsible businesses can't increase stock values. But a company can
be both profitable and socially responsible.
- Consider the 2008 Great Recession and one of its main causes, the subprime mortgage
crisis.2 These banks were more concerned about their investment portfolios instead of
properly loaning money to customers, which is their charge. Those investment portfolios were
filled with toxic assets, which eventually compromised the operations of many financial
institutions and caused the failure of several big banks. As a result, their share prices fell right
along with them. In this case, greed and a lack of social concern led to their downfall.
On the other hand, after almost failing during the Great Recession, automaker GM turned itself
around, strengthened its ability to withstand future recessions, and developed "greener"
vehicles. As a result, it realized an increase in its share price

Note: Business firms cannot exist and profit in the long run without being socially responsible

Pros and Cons of Shareholder Wealth Maximization

Pros:

1. Can Create Long-Term Value:

○ Focusing on maximizing shareholder wealth often leads to strategic investments and
efficient operations, which can drive long-term growth and profitability.
2. Aligns Shareholder and Manager Goals:
○ It ensures that managers are motivated to make decisions that enhance shareholder
value, as their interests are closely tied to stock performance and dividends.
3. Provides a Clear Framework for Decision-Making:
○ It offers a straightforward objective for evaluating business decisions, making it easier
to assess the potential impact on shareholder value.

Cons:

1. Other Business Goals Can Suffer:

○ Emphasizing shareholder wealth might lead to neglecting other important aspects, such
as employee welfare, environmental sustainability, or product quality.
2. May Go Against Public Interest:
○ Strategies focused solely on maximizing shareholder value can sometimes conflict with
broader societal or environmental concerns, potentially harming the public interest.
3. Can Conflict with Manager Goals:
○ Managers might face pressure to meet short-term financial targets to boost stock
prices, which can be at odds with long-term company health or personal values.
How do you measure shareholder wealth maximization?
- You can measure shareholder wealth maximization by finding the value of the company's
common stock. You can measure progress on a per-share basis by seeing how much the
company's stock price has increased, although you must account for any stock splits (or
reverse stock splits)

- Shareholder wealth maximization is measured primarily by the company’s stock price

and the dividends paid to shareholders. Higher stock prices and increasing dividends
indicate greater shareholder wealth.

Why is shareholder wealth maximization important?

- Shareholder wealth maximization is important because it provides a guiding objective (subject
to laws and ethical norms) upon which a firm's managers can base their decisions. This goal
gives the managers clear direction in the face of otherwise competing interests and priorities. It
has become one of the most common norms in corporate governance.

- Shareholder wealth maximization is important because it ensures the company's

long-term success, attracts investment, and aligns management's goals with
shareholders' interests, leading to increased stock prices and dividends, which benefits
both the company and its investors.

What are the ways on Shareholder’s Wealth Maximization?

To maximize shareholder wealth, a company can focus on increasing profits by boosting sales and
cutting costs. Investing in growth opportunities, like creating new products and expanding into new
markets, is also key. Using money wisely by choosing profitable projects and managing assets
efficiently helps too. Regularly paying dividends and increasing them over time makes shareholders
happy. Additionally, buying back company shares can raise the value of the remaining shares.
Ensuring good corporate practices, managing risks, maintaining strong relationships with customers
and employees, and adopting sustainable practices are also important. All these actions together
help in maximizing shareholder wealth.

Ways to maximize shareholder wealth include increasing profits, investing in growth

opportunities, managing money wisely, paying and increasing dividends, buying back shares,
and maintaining good corporate practices.

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