The financial management function
Objectives and decisions
Financial management is concerned with planning, raising, investing and monitoring funds to meet an organisation's objectives. For a listed company the conventional primary objective is to maximise shareholder wealth, usually interpreted as maximising the present value of expected future cash flows and therefore the market value of equity. This is not the same as maximising accounting profit, sales revenue or market share. The three core decisions are investment, financing and dividend policy.
Agency and stakeholders
Owners delegate to managers, creating an agency relationship. Agency costs include monitoring, bonding and residual loss. Managers may pursue growth, perks or risk reduction at shareholders' expense. Corporate governance mechanisms such as board structure, independent directors, audit and performance-linked remuneration seek to align interests. Stakeholders such as employees, customers, lenders, government and society also affect decisions, but in exam questions distinguish shareholder wealth maximisation from broader stakeholder claims.
Traps and rule of thumb
Common traps: treating profit as cash; ignoring timing and risk; confusing the treasury function with the finance department as a whole; assuming all stakeholders have equal priority. The treasury function manages liquidity, funding, currency and interest-rate risk, not detailed management accounting.
Rule of thumb: a decision creates shareholder value only if its expected incremental cash flows, discounted at an appropriate risk-adjusted rate, have a positive net present value. Worked example: a project needs $500,000 now and is expected to produce present value of $560,000. NPV is $60,000, so accepting it increases shareholder wealth by $60,000 before financing effects.