Financial Management is based on three main financial decisions - investment, financing and dividend.
Investment decision
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The investment decision is about how a company fund is invested in different asset as to earn the highest return possible for its investors. It can be long term or short term.
- Long term investment decision It involves financing on long term basis.for example investing in new machine to replace the existing one or by opening a new firm branch etc.
- Short term investment decision It is concerned with the decisions on the level of cash, inventory and the receivables. For a good working capital management one has Efficient cash management,Efficient inventory management ,Efficient receivables management.
2.Financing Decision
Financing decision is about the financing pattern or the debt and equity proportion. It is concerned about the decisions on how much capital should be raised and from which source. Factors affecting financing decision
- Cash flow position A strong cash flow position can make debt financing more good than equity. If cash flow position is weak debt financing is not advisable as interest on debt has to ve paid.
- Fixed operating cost Id a business has large operating costs on buliding, rents, insurance, premium etc it must reduce fixed financial costs .
- Risk Use of more debt can increase a financial risk on the company and the business. Financial risk is a position where company is not able to meet its charges like interest payments, dividend and some obligations.
3. Dividend Decision
Dividend Decision involves how much profit should be distributed among the shareholders and how much should be retained by the business after paying tax and all. Factors affecting dividend Decision
- Amount of earnings Dividend are paid on current and past earnings.earning determine a major of dividend decision.
- Stability of dividends Companies follow the policy of stable dividend per share. The increase in dividends is generally made when the potential of company increases .
- Growth opportunities Companies has good opportunity to grow and can retain more money out of there earnings to finance the required investments and can pay smaller dividend. Now growth companies pay more dividend as other things remain same.
So hence these where the major decisions of financial management in a business . Through these decisions a company can maximize its growth potential and can create further more profits and return on investments.