Following are the objectives of financial planning:

(i) To Ensure Timely Availability of Finance: The first objective of financial planning is to make finance available in time. Under it, the long-term and short-term financial needs are anticipated and then the sources of availability of finance are located.

(ii) To Ensure Proper Balance of Finance: It is always ensured that the balance of cash should neither be in excess nor in short. The balance of cash in both these situations is harmful. For example, if the balance of cash needed is rupees five lakh but the actual cash balance is ten lakhs, the cash of five lakhs will remain idle and it will incur loss of interest. On the contrary, if only rupees three lakh are available instead of rupees five lakh, it will damage the reputation of the company for not making timely payments.

In short, it can be said that the objective of the financial planning is to make finance available in appropriate quantity and make it available well in time.

It refers to the risk of the company not being able to cover its fixed financial costs. The higher levels of risks are attached to higher degrees of financial leverage. With the increase in fixed financial costs, the company is also required to raise its operating profit (EBIT) to meet financial charges. If the company cannot cover these financial charges, it can be forced into liquidation.

The chief factors affecting dividend decision are the following:

(i) Earning: The dividend is paid out of the present and reserved profits. Therefore, greater amount of total profit will ensure greater dividend.

(ii) Stability of Earnings: A company having stable earnings is in a position to declare more dividends and vice-versa.

(iii) Stability of Dividend: Every company adopts the policy of maintaining the stability of dividend per share. (Here the stability of dividend means that the dividend will, in no case, be allowed to fall. It is always good if the dividend remains stable or increases.) From this point of view, a little change in profit should not be allowed any increase or decrease in the dividend.

(iv) Growth Opportunities: If the company has more opportunities for growth, it will require more finance. In such a situation, a major part of the income should be retained and a small part of it should be paid as dividend.

(v) Cash Flow Position: The payment of dividend results in outflow of cash. It is possible that the company may have enough income but it is equally possible that it may not have sufficient cash to pay dividend. In this way, the cash flow position of the company is a factor that determines the dividend decision. The better the cash flow position of the company, the better will be the capacity of the company to pay dividend.

(vi) Shareholder Preference: There are two types of shareholders from the point of view of investment: (a) those who invest with the purpose of getting some regular income and (b) those who invest in the company to gain capital profit. If the majority of the shareholders are of the former type, the company must declare dividend according to their expectation. On the contrary, if the majority of the shareholders are of the latter type the company enjoys freedom about declaring dividend.

Capital structure refers to relative proportion of different sources of long-term finance.

The objective of financial management is to maximise the wealth of the owners of the business to the maximum extent.

According to this approach, owners’ interest can be best served by wealth maximisation. Wealth maximisation means to increase the capital invested in the business by the shareholders. Market price of the shares is the index of the capital invested. If the market price of the shares increases, it can be said that capital (wealth) invested by the shareholders has been appreciating. On the contrary, fall in the market price of the shares has an adverse effect on their wealth. Wealth of the shareholders can be computed by the following formula:

Shareholder’s Current Wealth in a Company = Number of Shares x Market Price Per Share.