Various Decisions under Financial Management

The various decisions under financial management can be categorized under the following four heads –

  1. Investment Decision

  2. Finance Decision

  3. Dividend Decision

  4. Liquidity Decision

Various Decisions under Financial Management are –

(1) Investment Decision:

The investment decisions are concerned with identification of investment opportunities and efficient allocation and utilization of funds to maximize a company`s profitability in the long run.

Investment decisions may be classified under two groups:

  1. Long term investment decision or Capital budgeting decision

  2. Short term investment decision or Working Capital management

Capital budgeting decisions are concerned with allocation of capital funds to long term assets. It involves analysis of various alternative investment proposals and determining the best alternative for investment.

Working Capital Management is concerned with management of current assets of a firm to maintain an optimal mix of profitability and liquidity.

The mix of long term and short term assets determine the risk profile of a business and the cost of capital incurred by a business.

(2) Financing decisions:

These are Concerned with when, where from and how to acquire funds to meet a firm’s investment needs. It involves determining the proper asset mix for a business.

All business activities require funds that are procured from various sources like Shareholders, Banks, Financial Institutions etc. The capital Structure of a firm is a mix of debt and equity capital. A finance manager must select such sources of finance that will make an optimal capital structure (mix of debt and equity) and where the cost of capital is minimal.

(3) Profit allocation or Dividend decision:

It is concerned with disbursement of profits back to the shareholders and investors of the business. Dividend refers to that portion of profits which is distributed by the company to its shareholders. A business must decide whether to distribute all profits or retain them, or distribute a portion and retain the balance.

Dividend Decisions taken by a financial manager –

  1. Dividend payout ratio- Profits distributed as dividends.

  2. Retention ratio- Portion of profits retained.

  3. Debt and dividend policies

(4) Liquidity Decision:

It is concerned with proper management of a firm`s current assets. These decisions have time horizon of less than a year and involves management of day to day fund requirements of a firm. Firms rely on Short term borrowings and investment of surplus cash to meet its daily working capital requirements. Liquidity decisions aim at minimizing the idle cash and reducing cost of surplus cash.

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