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Question

Every manager has to take three major decisions while performing the finance functions. Explain them.


Solution

Financial management is concerned with optimum procurement as well as usage of finance. It aims at mobilisation of funds at a lower cost and deployment of these funds in the most profitable activities. Three broad decisions are:

(i) Investment decision: It relates to how the firm's funds are invested in different assets so that the firm can earn the highest possible returns on investment. Investment decisions can be long-term or short term.

(ii) Financing decision: It is concerned with the decisions of how much funds are to be raised from which long-term source, i.e. employing shareholders' funds or borrowed funds. Shareholders' funds include share capital, reserves, and surplus and retained earnings, whereas borrowed funds include debentures, long-term loans, and public deposits. 

(iii) Dividend decision: It relates to how much of the company's net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements. This decision should be taken, keeping in mind the overall objective of maximising shareholders' wealth.

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