Goals of Financial Management

In this chapter, we will explain the goal of financial management. It is essential to always know the end goal when contemplating various strategies and making financial decisions. If a company focuses only on quality and makes a great product but does not make money, can they stay in business? If managers act to improve their own wealth, what happens to the future value of the corporation?

Valuation

Valuation, a goal of financial management, often relies on fundamental analysis of financial statements.


LEARNING OBJECTIVE

  • Describe the valuation process


KEY POINTS

  • In finance, valuation is the process of estimating what something is worth. Valuation is used to for a variety of purposes: the purchase or sale of a business, appraisal to resolve disputes, managerial decisions of how to allocate business resources, and many other business and legal purposes.
  • Valuation often relies on fundamental financial statement analysis 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.
  • Not only do managers want to keep reliable financial statements so that they can know the value of their own businesses, but they also want to manage finances well to enhance the value of their businesses to potential buyers, creditors, or investors.


TERMS

  • financial statement

    A formal record of all relevant financial information of a business, person, or other entity, presented in a structured and standardized manner to allow easy understanding.

  • fundamental analysis

    An analysis of a business with the goal of financial projections in terms of income statement, financial statements and health, management and competitive advantages, and competitors and markets.

  • valuation

    The process of estimating the market value of a financial asset or liability.

Introduction

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 he


Valuation

In finance, valuation is the process of estimating what something is worth. Valuation often relies on fundamental analysis (of financial statements) of the project, business, or firm, 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 assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company).

Valuation is used to determine the price financial market participants are willing to pay or receive to buy or sell a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establishing a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes. Therefore, not only do managers want to keep reliable financial statements so that they can know the value of their own businesses, but they also want to manage finances well to enhance the value of their businesses to potential buyers, creditors, or investors.


Source: Boundless
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