Financial management is based on three broad financial decisions. What are these?
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SOLUTION :
The three broad financial decisions based on financial management are :
(a) INVESTMENT DECISIONS :
A business needs to invest financial resources for setting up new enterprise, for expansion and modernisation. The decision whether on not invest in the funds in the project is taken after careful scrutiny of various alternatives. The Finance manager evaluates in financial implication of all the alternative in terms of their cost, expected income and cash inflows. The project with the highest expected economic benefit is selected.
(b) FINANCING DECISION :
Financing decision relates to source of financing the selected projects. The business can either finance from its shareholders funds (equity shares, preference shares or accumulated profits) or through borrowings (in the form of issue of debentures or raising of loans). However, prudent mix of shareholders fund and borrowed funds is always advised. Finance manager decides the proportion of these source under financing decision.
(c) Dividend decision :
The net earnings of company are divided into two parts dividend and retained earnings.
When a part of earnings of the company is given to its shareholder , it is known as dividend paid to shareholders.
When a part of earnings is retained with the company for reinvestment in the business, it is known as retained earnings. Deciding the proportion of dividend to be paid and retained earnings is called dividend decision.
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