There are 3 most important functions or the decisions under financial management, which are:
- Investment decisions
- Financing decisions
- Dividend decisions
Let’s learn more about it.
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Investment decision relates to the careful selection of assets in which funds will be invested by the firms. An investment decision can be long terms like fixed assets or short-term like current assets. When the decision regarding fixed assets is taken, it is also called capital budgeting decisions.
The financing decision is the second most important decision which the finance manager has to take is to decide the source of finance. The main sources of finance can be divided into 2 categories:
- Owner’s Fund: These are those which are owned by the company. It includes retained earnings and shares capital.
- Borrowed Fund: It includes debentures, loans, bonds, etc.
The dividend is that portion of the profit which is distributed to the shareholder. The decision involved here is how much of the profit earned by the company after paying tax is to be distributed to the shareholder and how much of it should be retained in the business. Generally, new and upcoming companies keep aside more of the retained earning and distribute fewer dividends, whereas, established companies prefer to give more dividends and keep aside less profit.
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