Financial Management · Financial objectives and relationship with corporate strategy

Nature and Purpose of Financial Management for ACCA FM

Updated 11 October 2026 · Fact-checked

Financial management is the planning and control of an organisation's finance to achieve its objectives. It rests on three decisions: investment (what to spend on), financing (how to pay for it) and dividend (how much to return to owners). In the exam, link each decision to strategy and shareholder wealth.

Understand Nature and Purpose of Financial Management

Every organisation needs money to operate and grow. Financial management is the work of deciding where that money should go, where it should come from, and how any surplus should be shared. It exists to help the organisation meet its objectives. For a company, the main objective is usually to maximise shareholder wealth.

There are three key decisions. The investment decision is about which projects and assets to spend on, such as a new factory, a takeover or more inventory. The financing decision is about how to fund those investments: equity, debt, retained earnings or a mix. This sets the capital structure and the cost of capital. The dividend decision is about how much profit to pay out to shareholders and how much to keep for reinvestment.

The three decisions are linked. A big investment programme needs funds, so it affects financing. Paying high dividends leaves less retained profit, so it affects both financing and the ability to invest. Good financial management looks at all three together, not one at a time.

The finance function supports strategy in several ways. It provides information and forecasts so managers can choose between options. It appraises investments and checks they add value. It raises and manages funds, including working capital and cash. It manages financial risk, such as exchange rate and interest rate risk. It also monitors performance against targets and reports to owners, lenders and other stakeholders.

Financial management works at different levels. Strategic decisions are long term and large, such as entering a new market. Tactical decisions are medium term, such as budgets. Operational decisions are day to day, such as collecting receivables and paying suppliers. Exam answers should show you can tie the finance function to the strategy of the business in the scenario.

Key rules to remember

The three key decisions: Investment decision + Financing decision + Dividend decision; Learn the three names and a one-line meaning of each. They are interlinked, not separate.
Primary financial objective of a company: Maximise shareholder wealth = dividends received + increase in share price; Shareholder return over a period is dividends plus capital gain, usually measured against the opening share price.
Total shareholder return (TSR): TSR = (P₁ − P₀ + D₁) ÷ P₀; P₀ is the opening share price, P₁ the closing price, D₁ the dividend for the period.
Link between decisions and value: Value is created when project return > cost of capital; A project adds wealth only if it earns more than the return investors require for its risk.

How to solve Nature and Purpose of Financial Management questions

Use this method for any question on the role or purpose of financial management, whether objective test or written.

1Read the scenario and note the organisation's type: listed company, private company, not-for-profit or public sector. This sets the objective.
2Identify the objective being asked about, usually shareholder wealth maximisation for a company.
3Decide which of the three decisions the question describes: investment, financing or dividend. Name it.
4Explain what the decision involves in the context of the scenario, using the facts given.
5Show how it links to the other decisions and to strategy, for example an investment that needs new funds.
6State the finance function's role: information, appraisal, funding, risk management or monitoring.
7Conclude with a clear recommendation or judgement, tied back to the objective.

Quickest way: Classify, link, conclude

When to use it: Use this for objective test questions and for short written parts when time is tight.

Spot the key verb. Spending on assets or projects means investment. Raising money means financing. Paying out or retaining profit means dividend.
Check whether the question asks for the decision, its effect or the function's role.
Pick the answer that links to shareholder wealth or strategy, not one that is only about profit.
For written answers, write one sentence naming the decision, one explaining it with scenario facts, and one linking it to strategy.

Common mistakes in Nature and Purpose of Financial Management

Saying the objective is to maximise profit.
Profit is easy to measure and is often used in earlier papers.
Fix: State shareholder wealth maximisation. Explain that profit ignores risk, timing of cash flows and retained funds.
Mixing up the investment and financing decisions.
Both involve large sums of money and often appear in the same scenario.
Fix: Ask: is the money being spent (investment) or raised (financing)? Label each part separately.
Treating the dividend decision as only about cash left over.
Students see dividends as a residual rather than a policy choice.
Fix: Explain that dividends signal information to investors and compete with reinvestment as a use of profit.
Describing the finance function in general terms with no link to the scenario.
Students recall a list from the notes and write it out.
Fix: Pick the two or three roles that fit the case and use its facts, such as a planned expansion or high borrowing.
Applying shareholder wealth to every organisation.
It is the headline objective in the syllabus.
Fix: For not-for-profit bodies, refer to value for money and service objectives. Check the organisation type first.
Treating the three decisions as independent.
Notes present them in separate sections.
Fix: Always add one sentence on how one decision affects another, such as high dividends reducing retained earnings.

Worked examples

Example 1

A listed manufacturer plans to build a new plant costing ₹40,00,00,000. It will fund this with a new bond issue and will cut the dividend this year to keep cash. Identify the three decisions in this plan and explain how they are linked.

Show the solution

Investment decision: building the new plant for ₹40,00,00,000 is a spending decision on a long-term asset.
Financing decision: issuing bonds to raise funds is the choice of debt over equity. It raises gearing and financial risk.
Dividend decision: cutting the dividend keeps cash in the business as retained earnings, which reduces the need to borrow.
Link: the size of the investment sets how much finance is needed. A lower dividend means less borrowing, so lower interest and risk. Shareholders may see the cut as a negative signal unless the plant promises a return above the cost of capital.

Answer: Investment = new plant; financing = bond issue; dividend = reduced payout. They are linked because the investment drives the funding need, and the dividend cut substitutes retained profit for borrowing. The plan creates shareholder wealth only if the plant earns more than the cost of capital.

Example 2

A company's share price rose from ₹200 to ₹218 during the year and it paid a dividend of ₹6 per share. Calculate the total shareholder return and explain why it is a better measure of the objective than profit.

Show the solution

Capital gain = ₹218 − ₹200 = ₹18.
Add the dividend: ₹18 + ₹6 = ₹24.
TSR = 24 ÷ 200 = 0.12, which is 12%.
Explain: TSR combines dividends and share price growth, which is what shareholder wealth means. Profit can be raised by accounting choices or short-term cuts and ignores risk and timing of cash flows.

Answer: Total shareholder return is 12%. It measures the actual gain to shareholders, so it reflects the objective of maximising shareholder wealth better than reported profit.

Exam tips

Always name the decision before explaining it. Markers look for the exact terms: investment, financing and dividend.
In written answers, use facts from the scenario. Generic lists score poorly.
Check the organisation type. A charity or public body needs value for money, not shareholder wealth.
Objective test questions on this topic often test a definition or classification. Read all four options before choosing, as marking is all or nothing.
Add one linking sentence between decisions. It is a cheap way to show higher-level understanding.

Practice questions from Financial objectives and relationship with corporate strategy

Nature and Purpose of Financial Management in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Nature and Purpose of Financial Management: frequently asked questions

What are the three key decisions of financial management?

They are the investment decision, the financing decision and the dividend decision. Investment is what to spend on, financing is how to pay for it, and dividend is how much profit to return to shareholders. They affect each other, so they should be considered together.

What is the main purpose of financial management in a company?

The main purpose is to help the company achieve its objectives, which for most companies means maximising shareholder wealth. It does this by choosing value-adding investments, using suitable finance and setting a sensible dividend policy.

How does the finance function support corporate strategy?

It appraises strategic options, raises the funds needed, manages financial risk and monitors results against targets. It also reports to stakeholders. This lets managers choose and carry out strategies that the business can afford and that add value.

Is financial management the same as financial accounting?

No. Financial accounting records and reports past transactions to external users. Financial management looks forward and uses information to make decisions on investment, funding and dividends.