In this article we will discuss about Financial Management and its basic financial decisions.
Financial management is a process of effectively management of finance in organization so that they get maximum return. This process consist of planning, organizing, directing and controlling the financial activities in organization which involved from where organization get finance, whether it is in Short/Medium/Long term and how effectively that finance is utilized so that they get maximum in return.
Scope/basic Financial Decisions
The scope or basic financial decisions are to understand the problems of organization and to solve the problem of an organization. There are three financial decision which are:
- Investment decision: In this financial decision financial manager has to decide that where to invest so that worth or value of firm increases to get maximum output with minimum investment. Manager has to decide whether to invest for short or Long-term.
When we talk about short-term investment it consist of investment in day-to-day (Working Capital) of organization. In long-term investment the organization invest on fixed assets such as purchase of land and building, purchase of machinery, etc.
2.Financing Decision: In this financial decision financial manager has to decide the source of finance whether he has to go for debt financing or equity.The term financing decision concerned with capital structure that is combination of debt financing and equity capital.Here financial manager decide that how much to raise from which source i.e equity or debt financing.A higher proportion of debt financing involves higher risk and higher return to shareholders and vice-versa.The financing decision covers two aspects are Capital structure theory and capital structure decision. There are two sources of fund are:
- Borrowed Fund: Borrowed fund involved Debentures, Bonds, and Loans. Higher risk involves in borrowed fund because we have to pay them back and there is fix commitment to return on particular time.
- Owners Fund: It involves share capital, Retain earnings etc. It doesn’t involves risk because there is no fix commitment to return. For example: Retain earnings these are the companies past year savings they don’t have to pay this to anyone so that no risk is there.
- Dividend Decision:In financial management the third major decision is dividend decision. In this manager decide that in which proportion dividend has to be divided or dividend payment ratio.Dividend is distributed out of the companies profit or distribution of surplus funds.Firstly company has to pay to the creditors and debenture holders with interest and remaining profit is distributed among equity share holders and remaining amount retain for the future uncertainty.
So here we discuss about financial management and its basic financial decision.For any query comment below.