Decisions of Financial Management

The finance function refers to following three major decisions which the finance manager has to take:
1. Investment Decision
2. Financial Decision
3. Dividend Decision
1. Investment Decision: The first and foremost decision is concerned with the allocation of funds to different investment proposal. This decision relates to the careful selection of assets in which funds will be invested.. These investment porposal are evaluated on the basis of their expected returns and risks involved. Investment decision involve the investment of funds among fixed and current assets. A long-term investment decision is called a Capital Budgeting Decision. These are like acquiring a new fixed assets, opening a new branch etc. Short-term investment decision are called Working Capital Decision. These are concerned with the decision about the levels of cash, inventories and debtors etc.

2. Financial Decision: Financial decision relates to raising funds. This decision is about the quantum of finance to be raise from various long-term sources. It involves identification of various available sources which may be debt, equity share capital, preference share capital and retained earnings etc. A proper mix of these sources, known as capital structure, is essential. The most appropriate souces of funds are selected and the amount of funds to be raised from each source is determined. A balanced capital structure has to be decided which involves determining the proportion or ratio between equity and debt.

3. Dividend Decision: Dividend decision relates to the appropriation of profits earned. Net profits (after tax) are divided into two parts - retained earning and dividends. Dividend is that protion of a company’s net earnings which is paid out to the shareholders and the profits, which are retained in the business for re-investment purpose are known as retained earning. Financial manager has to make a major decision that how much profit earned by the company are to be distributed to the shareholder and how much of it should be retained in the business for meeting the investment requirements.