Financial management decisions are importantly made by the financial managers about the finance mix-up of an organization. It is focused on the borrowing and allocation of funds for investment decisions. Let’s learn about the decision of financial management in detail.
The decisions of financial management arise from 2 major sources from where the fund can be obtained- the own money of the organization like share capital, retained earnings and borrowing funds from outside like debentures, loans, etc. Moreover, the primary objective of the decisions is to attain a balance of an optimum capital structure. The decisions of financial management give several benefits of financial management.
What is Fundamental to Financial Management Decisions?
There are 3 types of basic financial management decisions listed below:
- Investment Decision
- Financing Decision and
- Dividend Decision
1. Investment Decision
The investment decision is also known as the Capital Budgeting Decision. The resources and assets of the company are the most valuable and these need to be invested very carefully. Moreover, a firm should pick the investment where it can get the best return. Investment decisions of financial management should be done carefully.
2. Financing Decision
Financial decision is the most important aspect of decisions of financial management to be made by the business personnel. These must be done with proper analysis as it decides where, when, and how should the business acquire the fund. In addition, increasing in shares of the firm is not an indication of its development, but it must also boost the wealth of the investors.
3. Dividend Decision
A dividend decision is an essential part of financial management decisions and is equally important which is about the distribution of the profit generated by the organization. The main criteria for this decision are to distribute the profit to the furthermore shareholder or retain the earnings. Lastly, it depends on the business earnings and dependency on earnings.
Importance Of Financial Management Decision
The decision in financial management is equally important for maintaining the financial equilibrium of the organization. Let’s learn more about it:
1. Long-term Growth and Effect
Financial decisions related to the long-term use of assets are very helpful for the production process. In addition, profit is earned by selling products and services. The higher the business growth, the more effective decision needed. Moreover, it affects the future aspect of the organization as well.
2. A Large Number of Funds Involved
Funds are the base of the decision of financial management of the business organizations. The decision for the fixed assets is included in capital budgeting as huge capital is invested. In case of a wrong decision, it can cause a heavy loss of capital and a shortage of resources.
3. Risk Involved
The decision in financial management involves risk due to 2 reasons- these are analyzed for the long term and the average profit is equally important and anticipated which faces huge fluctuations and it involves heavy investments which make it very difficult to change the decision.
4. Irreversible Decisions
Decisions in financial management are irreversible and cannot be reformed. For example, if you open a sugar mill and then decide to change the business, you need to sell all the resources at loss. In the same way, changing the decision in addition to financial management can cause huge losses.
Factors of Financial Management Decisions
The factors affecting the decision of financial management are:
1. Cash flow of the venture
The cash flow of the organization decides the investment decision. There must be a proper cash flow sustained to take the best decisions in financial management.
2. Profits earned by the company
The fundamental aim of any organization is to earn a profit and make money. The profit earned by the company decides where to invest the money further.
3. Investment criteria
Organizations use various capital budgeting procedures to assess investment propositions. Lastly, they are based on calculations concerning investment, ROI cash flow, etc.
Financial Management Decisions – FAQs
What is the main purpose of the decision of financial management?
Ans. The main purpose of decision of financial management is to make full use of money with better financing.
