Types of Financing Decisions - Investment Decisions, Dividend Policy Decisions

The decisions taken by financial managers on behalf of an organization for the long term are known as financing decisions. These decisions are important because every department is related to the finance department in one way or the other. Therefore, care must be taken related to the nature of financial matters of the company.

The nature of financing decisions is dynamic and there are some distinct differences among the major types of decisions.

Investment Decisions

Investment decisions are related to total assets to be held, the risk composition, and the mix of the total assets of the company.

The nature of investment decisions depends on the following factors −

• Whether the nature is long term or short term. Long-term investment decisions are of more than one year.

• The allocation of capital to be invested which is related to

  • The right mix of debt and equity in the capital expenditure.

  • The number of public assets to be allocated.

  • How to obtain the right mix in the market?

• Short-term financial investment decisions include cash and equivalents, inventories, and receivables.

Note − Short-term business decisions are meant for a year or less.

Financing Decisions

The nature of financing decisions is dynamic in nature and the financial managers need to find the ideal mix of debt and assets to find the right financial mix. The nature of financing decisions includes the following −

• The source of funds needs to be determined and it can be a mix of assets and debts.

• There is a cost of funds. This is the interest the lenders collect for offering capital.

• There are instruments to be availed to raise the funds.

• Financial institutions can offer the needed funds but the interest must not be too high.

• Innovations can be a game-changer in raising funds and allocating them in various financial vehicles.

Note − Sourcing funds should be determined by financial managers for the wellbeing of the company.

Dividend Policy Decisions

Dividends are the distributed portions of profits. A firm must be aware that shareholders must be happy at the end of the day because they are the force behind the company's growth. The nature of dividend decisions are as follows −

• Payment of profits and retained earnings must be calculated keeping the best mix in mind.

• Growth and dividend payouts are inversely applicable to each other. An increasing growth figure means less dividend payout.

• Dividends policy needs to regard a lot of factors - the expectations of shareholders, the financial position of the company, and the right debt to dividend mix, etc.

Note − Dividend Policy refers to the use of dividends a company earns in a given time.