Give the meaning of 'Investment ' and 'Financing' decision of financial management.

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Solution

The following are the two decisions of financial management.
(i)Investment decision: This term refers to the decisions regarding where to invest so as to earn the highest possible returns on investment. These decision can be taken for both long term and short term. Long term investment decision, also known as capital budgeting decision,affect a business'long term earning capacity and profitability.For example,investment in a new machine is a long term investment decision. Short term investment decision,also known as working capital decision,affect a business' day to day working operations.For example,decision regarding cash or bill receivables are short term investment decisions.
(ii)Financial decisions: Such decision involves identifying various sources of funds and deciding the best combination for raising the funds. The main sources for raising funds are shareholders funds (referred to as equity) and borrowed funds(referred to as debt).Based on the cost involved,risk and profitability,a company must judiciously decide the combination of debt and equity to be used. For example, while debt is considered to be the cheapest source of finance,higher debt increases financial risk . Financial decisions taken by a company affect its overall cost of capital and financial risk.

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