What are key decisions of financial management?

Decision making helps to utilise the available resources for achieving the objectives of the organisation, unless minimum financial performance levels are achieved. Financial management provides both conceptual and analytical framework for financial decision making. The key aspects of financial decision making relate to financing, investment, dividends and working capital management.

The top three financial decisions along with the factors affecting the respective decisions are mentioned below −

  • Investment decisions

Investment decisions tells about total amount of assets to be held in the firm. Since, funds involve cost are available in limited quantity proper utilisation is required for achieving the goal of wealth maximisation.

Investment decisions can be classified into two types, which are −

  • Long term investment decision (capital budgeting)
  • Short term investment decision (working capital management)

Factors effecting investment decisions are −

  • Cash flow of the project.
  • Rate of return.
  • Investment criteria involved.

Financial Decision −

It is more concerned with the amount of finance to be raised from various long term sources. In another way, it is a decision on the capital structure (owner’s fund, borrowed fund) of the company.

Risk of default on repayment of interest on borrowed fund is called financial risk.

Factors affecting financial decisions are −

  • Cost.
  • Risk.
  • Flotation cost.
  • Cash flow position of the business.
  • Control considerations.
  • State of capital markets.

Dividend decisions

This decision is mainly concerned with distribution of surplus funds. This surplus funds are either distributed to the shareholders in the form dividends, or are kept aside in the form of retained earnings.

Finance manager will decide how to spend in dividends and how much to keep aside. If more investment opportunities are available and company has growth plans, then more amount is kept aside and less amount is given to shareholders. This decision is also called residual decision.

Factors affecting dividend decision are −

  • Earnings.
  • Stability of earnings.
  • Cash flow position.
  • Growth opportunities.
  • Stability of dividend.
  • Preference of shareholders.
  • Taxation policy.
  • Access to capital market considerations.
  • Legal restrictions.
  • Contractual constraints.
  • Stock market reaction.