Last Updated on December 18, 2021 by Jayprakash Prajapati
Hello, what is the definition of financial decisions? These financial decisions refer to decisions related to the financial affairs of a business firm.
There are many types of financial management decisions. But we will throw light on the top 4 types of decisions. Who are the producers of the firm to maximize shareholder wealth, that is, assets to be earned, patterns of capitalization, distribution of the firm’s income, etc? So let’s throw light on those four decisions.
1. Investment Decision
This investment decision relates to the determination of the firm’s total assets, the composition of these assets, and the firm’s business risk complexities reported by investors. This is the most important financial decision.
Since this is the cost involved in money. And it is available in a limited quantity because it is very important to use it properly to achieve the maximum goal of wealth. This capital budgeting is the decision-making process of investment in capital expenditure.
These are expenses, out of which benefits are expected to be received over a long period of more than one year. And this is to assess the profitability of various projects before funding the finance manager. Investment proposals need to be evaluated in terms of expected profitability, costs, and risks associated with projects.
This investment decision is important not only for the establishment of new units, but also for the expansion of existing units, the replacement of permanent assets, the cost of research and development projects, and the redevelopment of funds, if previously invested, not the result. Let’s bring it. As previously anticipated.
2. Financial decision
Once this firm has decided to invest and commit itself to new investment, then it is necessary to decide the best means of financing these commitments. But since companies regularly make new investments;
As the requirements for financing and financial decisions continue, a firm must be constantly planning for new financial requirements. But this financing decision is not only the best for financing new assets, but also relates to the best overall mix of financing for the firm.
Which is that a finance manager must choose such sources of funds. Which will create the optimal capital structure? And the important thing to be decided here is the proportion of different sources in the firm’s overall capital mix.
This should be fixed in such a way that the debt-equity ratio is such that it helps maximize the profitability of the concern. The rise of more loans will include fixed interest liability and dependence on outsiders. And it can help increase the return on equity.
But the risk will also increase. Raising funds through this equity will bring permanent wealth to the business. But, shareholders would expect a higher rate of earnings.
Which this financial manager has to strike a balance between the sources concerned. So that it improves the overall profitability of the concern. And if the capital structure is able to reduce risk and increase profitability. So the market prices of the shares will maximize the wealth of the shareholders.
3. Decision of Dividend
This third major financial decision concerns the disbursement of profits to investors who supplied capital to the firm. And the term dividend refers to that portion of the company’s profits. Which is distributed by its shareholders?
This was done by the shareholders in the company’s share capital. It is an investment reward. This dividend decision relates to the number of profits to be distributed among shareholders.
And it has to be decided whether to distribute the profits or retain all the profits in the business. Or to keep a portion of the profits in the business and to distribute it among the shareholders to others. This high rate of dividends can increase the market value of the shares.
And thus, can maximize shareholders’ funds. The firm should also consider the question of dividend stability, stock dividends (bonus shares), and cash dividends.
4. Liquidity Decision
This liquidity and profitability are closely related. Which it obviously is, and this is the goal of liquidity and profitability conflicts in most decisions. Which this finance manager always believes in and faces the task of balancing liquidity and profitability.
If the term liquidity means that, the firm benefits from its ability to meet bills and the firm’s cash reserves to meet emergencies. However, the goal of profitability is to achieve the goal of higher returns.
As previously stated, it is a difficult task to strike a proper balance between liquidity and profitability. But this is when all the bills will be settled in advance. So this profitability will be affected. Similarly, liquidity will be affected by investing in short-term or long-term securities. But this is why funds are insufficient to pay their creditors. Under extreme circumstances, the lack of liquidity can lead to problems for the firm.