Financial management focuses on the practical significance of financial numbers. It asks: what do the figures mean? Sound financial management creates value and organizational agility through the allocation of scarce resources among competing business opportunities. It is an aid to the implementation and monitoring of business strategies and helps achieve business objectives. There are several goals of financial management, one of which is valuation.
In finance, valuation is the process of estimating what something is worth. Valuation often relies on fundamental analysis of the financial statements of the project, business, or firm, and using tools such as discounted cash flow or net present value. As such, an accurate valuation, especially of privately owned companies, largely depends on the reliability of the firm’s historic financial information. Items that are usually valued are a financial asset or liability.
Valuations can be done on:
The idea of maximizing shareholder value comes from interpretations of the role of corporate governance. Corporate governance involves regulatory and market mechanisms and the roles and relationships between a company’s management, its board, its shareholders, other stakeholders, and the goals by which the corporation is governed.
In large firms where there is a separation of ownership and management and no controlling shareholder, the principal–agent issue arises between upper-management (the “agent”) and shareholders (the “principals”). The danger arises that, rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management.
Thus, one interpretation of proper financial management is that the agents are oriented toward the benefit of the principals – shareholders – in increasing their wealth by paying dividends and/or causing the stock price or market value to increase.
The idea of maximizing market value is related to the idea of maximizing shareholder value, as market value is the price at which an asset would trade in a competitive auction setting.
EXAMPLEFor instance, returning value to the shareholders if they decide to sell shares or if the firm decides to sell.
The stakeholder concept is associated with the concept of corporate governance. As mentioned above, corporate governance involves regulatory and market mechanisms and the relationships that exist between a company’s management, its board, its shareholders, other stakeholders, and the goals for which the corporation is governed.
Stakeholders are those who are affected by an organization’s activities. The stakeholders can be:
In the field of corporate governance and corporate responsibility, a major debate is currently occurring about whether a firm or company should make decisions chiefly to maximize value for shareholders, or if a company has obligations to other types of stakeholders. This increased after the financial crisis of the late 2000s, when concerns deepened about the potential of companies to lower the welfare of other stakeholders while maximizing their shareholder value.
Some people who argue that businesses should consider other stakeholders, like the government or the environment, argue that an attention to these types of stakeholders is intimately entwined with market value. They also argue that a holistic view can enhance general outcomes for all the stakeholders that are involved. Still others argue that stakeholders, even if they are not considered in business decisions, should at the very least not suffer harm, and that businesses should maximize value only if they can do so without generating harm.
Source: THIS CONTENT HAS BEEN ADAPTED FROM LUMEN LEARNING'S “GOALS OF FINANCIAL MANAGEMENT” TUTORIAL.