‘Every Manager has to take three major decisions while performing the finance function’ briefly explain them.

4 years ago

Financial Management

The three important decisions taken by the finance manager are as follows –

1.Investment decision: It refers to the selection of the assets in which investment is to be made by the company. Investment can be made in Long term fixed assets and short term current Thus Investment decision is divided in two parts :

- Long term Investment decisions: Such decisions are also called Capital Budgeting decisions. It relates to the investment in long term fixed assets. As such decisions affects the growth of the firm, it involves huge fund to be blocked for a long period, and such decisions are irreversible in nature, they should be taken carefully after making a comparative study of various alternatives
- Short term Investment decision (Working capital decision): It refers to investment in short term assets such as cash, inventory, debtors etc. Finance manager has to ensure that enough working capital is available to meet the day to day It should also ensure that unnecessarily high reserve of working capital should not be retains as it decreases the profitability. Thus profitability and Liquidity are to be compared and appropriate amount kept as working capital.

Financing decision: There are various sources of obtaining long term finance such as Equity shares, preference shares, term loans, Debentures etc. For taking financing decision and deciding the capital structure various factors are to be considered and an analysis of cost and benefit is made.

Dividend decision: It refers to the decision related to the distribution of profit. The finance manager has to decide as to how much amount of profit is to be distributed as Dividend and how much to be retained in the business. If too much retained earnings are maintained, it dissatisfies the shareholders as they receive less dividend. Similarly if a liberal dividend policy is followed, though the shareholders are satisfies, but the firm does not have enough reserve for future growth, expression, meeting contingency etc.

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Sanisha Maharjan

Sanisha Maharjan

Jan 16, 2022

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