Financial Management's Types of Financial Decisions Investment Decisions, Financing Decisions, and Dividend Decisions are the three main categories that Financial Management divides financial decisions into.
1. Investment Decision/Capital Budgeting Decisions
The assets and resources of a corporation are limited and must be used to their full potential. To achieve the best possible results, a company should choose where to invest. Before making an investment decision, the organization needs to carefully consider all of its investment options. Of the three choices, it's safe to say that the investment choice is the most significant. It starts with determining the entire amount of assets that the company needs to hold. In other words, investment decisions concern the assets in which a company will put its money.
The most crucial factor to consider when selecting a venture is the rate of return it will provide for the business in terms of profit. For example, if, for the same period, venture A generates a 15% return while venture B generates a 25% return, you should choose project B.
Investment Criteria: A business has access to various Capital Budgeting techniques that you can use to evaluate different investment opportunities. These procedures are used to choose the best investment proposals. Above all, they’re based on multiple factors, including the amount of money invested, interest rates, cash flows, and the rate of return on investments.
2. Financing Decision
Making sound financial decisions about when, where, and how a firm acquires funds is critical for any organization. When the market value of a company's stock rises, which is a sign of the company's growth and investors' wealth, the company reaps the greatest benefits. Consequently, this affects the constitution of various instruments in the company’s capital structure.
The financial manager looks at the finance mix, capital structure, and leverage to figure out how much debt and equity are in the capital structure after figuring out how much money is needed and choosing assets to buy. The financial mix should be at its best in order to give shareholders the most money. It will be necessary to strike a suitable risk-reward balance. Debt has a fixed cost—interest—that can help boost equity return while also increasing risk. One permanent source of funds is the issuance of equity shares, but owners will expect higher rates of return.
What Are The Factors affecting
Financing Decisions?
Cost: Asset allocation and cost reduction are the primary considerations in a financing decision. An organization may have a number of different sources of funding, but each one has a very different price. An organization should carefully examine them to choose the most cost-effective source.
Risk: Starting a business with cash from diverse sources carries a variety of risks. Borrowed funds have a higher risk profile than equity funds. When selecting funding, this risk assessment is one of the most important factors. Cash flow position: Cash flow refers to the organization’s daily return. Its cash flow condition influences investors’ decisions on whether or not to invest in a company.
Control: Existing investors can borrow money to get cash if they want to take control of the business; however, if they are willing to share less in the company, you can use stock to get money. Choosing how much power is given up is a crucial financial decision. Market condition: Decisions regarding financing are significantly influenced by market conditions. During boom times, equity is the most common issue, but during a depression, a company will have to rely on debt. In the funding process, such judgments are crucial.
3. Dividend Decision
Dividends are a portion of profits that can be distributed to equity shareholders. You should examine dividend payments in light of a company’s financial decisions. When dealing with a firm’s net profits, there are two options: distributing profits as dividends to regular shareholders if there is no need to retain earnings or keep them in the firm if they are required to fund any business activity.
However, You should consider the impact of dividend distribution or retention on shareholders’ wealth. The best dividend policy increases both the market value of the company and the stock. The consideration of the factors to take into account when determining payouts is yet another aspect of dividend policy.
Tags
Daily Updates