Fundamental decisions in financial management

Even big companies and financial institutions prefer to invest in a company with regular and stable dividend policy.

The capital budgeting decisions affect the long term growth of the company. The amount of cash flow an investment proposal will be able to generate must be assessed properly before investing in the proposal.

Dealing With Cash Shortages A financial manager at times may be faced with difficult choices because the company does not have sufficient cash available to pay important expenses. The firm should also consider the question of dividend stability, stock dividend bonus shares and cash dividend.

There are three major financial management systems. If companies have no investment or growth plans then it would be better to distribute more in the form of dividend.

Under this scheme a fixed rate of dividend on investment is given and if profit or earnings increase then some extra dividend in the form of bonus or interim dividend is also given. The most important criteria to decide the investment proposal is rate of return it will be able to bring back for the company in the form of income for, e.

If the financial manager is over zealous in his collection efforts with customers who are paying slowly, he can damage customer relationships that have been carefully nurtured by the business owner and the marketing department. Whenever company requires more capital it can either arrange it by issue of shares or debentures in the stock market or by using its retained earnings.

Factors Affecting Dividend Decision: The third major financial decision relates to the disbursement of profits back to investors who supplied capital to the firm.

Fundamental decisions in financial management is the most important financial decision. Budgeting and short range planning decisions including cash flowcredit policies etc. So possible impact of dividend policy in the equity share price also affects dividend decision.

If there are more earnings then company declares high rate of dividend whereas during low earning period the rate of dividend is also low.

Hence, a firm will be continuously planning for new financial needs. Investment decisions are considered very important decisions because of following reasons: Investment Decision relates to the determination of total amount of assets to be held in the firm, the composition of these assets and the business risk complexions of the firm as perceived by its investors.

It has since developed into a very decision oriented field where internal decisions are made in context of the external financial environment with a goal of maximizing shareholder's wealth.

Estimations have to be made in an adequate manner which increases earning capacity of enterprise. Payment of interest to creditors, debenture holders, etc.

The firm invests its funds in acquiring fixed assets as well as current assets. So possible impact of dividend policy in the equity share price also affects dividend decision. Another important factor affecting dividend policy is expectation and preference of shareholders as their expectations cannot be ignored by the company.

This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

The stable dividend policy satisfies the investor. If more investment opportunities are available and company has growth plans then more is kept aside as retained earnings and less is given in the form of dividend, but if company wants to satisfy its shareholders and has less growth plans, then more is given in the form of dividend and less is kept aside as retained earnings.

If there are more earnings then company declares high rate of dividend whereas during low earning period the rate of dividend is also low. Budgeting and short range planning decisions including cash flowcredit policies etc.

The most important criteria to decide the investment proposal is rate of return it will be able to bring back for the company in the form of income for, e. What is a financial manager? If a company has a number of investment plans then it should reinvest the earnings of the company.

Under this system the company fixes up a fixed percentage of dividends on profit and not on investment, e.

Finance Manager: Three Major Decisions which Every Finance Manager Has to Take

Along with return, risk, cash flow there are various other criteria which help in selecting an investment proposal such as availability of labour, technologies, input, machinery, etc. As with personal investing, he must choose between safe investments with little upside potential and those that could appreciate in value but carry the risk of loss of principal in a stock market downturn.

Once the estimation have been made, the capital structure have to be decided. A firm has many options to invest their funds but firm has to select the most appropriate investment which will bring maximum benefit for the firm and deciding or selecting most appropriate proposal is investment decision.

So if a company is having large number of retired and middle class shareholders then it will declare more dividend and keep aside less in the form of retained earnings whereas if company is having large number of young and wealthy shareholders then it will prefer to keep aside more in the form of retained earnings and declare low rate of dividend.

Investment Decision Capital Budgeting Decision: As to invest in investment projects, company has two options: To ensure safety on investment, i.

Investment decision This decision relates to careful selection of Fixed and Current Assets in which funds will be invested by the firm.

What are the 3 main decisions a finance manager has to make?

If the capital structure is able to minimise the risk and raise the profitability then the market prices of the shares will go up maximising the wealth of shareholders.Oct 16,  · Very few people know the three keys to financial success, but they are equally as simple, and, after you read them, they will be perfectly obvious.

Financing Decisions: Once the firm has taken the investment decision and committed itself to new investment, it must decide the best means of financing these commitments. Since, firms regularly make new investments; the needs for financing and financial decisions are ongoing.

Finance decisions: Determining how the firm should finance or pay for assets. 3. Working capital management decisions: Determining how day-to-day financial matters should be managed so that the firm can pay its bill and how surplus cash could be invested.

Top 3 Types of Financial Decisions

The decision function of financial management can be divided into the following 3 major areas: INVESTMENT DECISION Determine the total amount of assets needed by a firm hence closely tied to the allocation of funds. Sep 11,  · The three types of financial management decisions are capital budgeting, capital structure, and working joeshammas.com Some case Dividend decision is also part of financial management.

The 3 fundamental decisions in finance team revolve around financial management according to the article written by Illie () for the challenges of finance on the function for the balance is, “The fast changes that took place in the economic environment to determine the role of financial managers is the function of the finance team%(2).

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Fundamental decisions in financial management
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