Fundamental decisions in financial management

Dealing With Cash Shortages A financial manager at times may be faced with difficult choices because the company does not have sufficient cash available to pay important expenses. He may have to choose, for example, between making a tax payment on time and making a loan payment on time.

Fundamental decisions in financial management

Investment Decision Capital Budgeting Decision: This decision relates to careful selection of assets in which funds will be invested by the firms. A firm has many options to invest their funds but firm has to select the most appropriate investment which will bring maximum benefit for the firm and deciding or selecting most appropriate proposal is investment decision.

The firm invests its funds in acquiring fixed assets as well as current assets. When decision regarding fixed assets is taken it is also called capital budgeting decision.

Cash Flow of the Project: Whenever a company is investing huge funds in an investment proposal it expects some regular amount of cash flow to meet day to day requirement.

Fundamental decisions in financial management

The amount of cash flow an investment proposal will be able to generate must be assessed properly before investing in the proposal. The most important criteria to decide the investment proposal is rate of return it will be able to bring back for the company in the form of income for, e. With every investment proposal, there is some degree of risk is also involved.

The company must try to calculate the risk involved in every proposal and should prefer the investment proposal with moderate degree of risk only. Along with return, risk, cash flow there are various other criteria which help in selecting an investment proposal such as availability of labour, technologies, input, machinery, etc.

The finance manager must compare all the available alternatives very carefully and then only decide where to invest the most scarce resources of the firm, i.

Investment decisions are considered very important decisions because of following reasons: Importance or Scope of Capital Budgeting Decision: Capital budgeting decisions can turn the fortune of a company.

The capital budgeting decisions are considered very important because of the following reasons: The capital budgeting decisions affect the long term growth of the company.

As funds invested in long term assets bring return in future and future prospects and growth of the company depends upon these decisions only. Large Amount of Funds Involved: Investment in long term projects or buying of fixed assets involves huge amount of funds and if wrong proposal is selected it may result in wastage of huge amount of funds that is why capital budgeting decisions are taken after considering various factors and planning.

The fixed capital decisions involve huge funds and also big risk because the return comes in long run and company has to bear the risk for a long period of time till the returns start coming. Capital budgeting decisions cannot be reversed or changed overnight. As these decisions involve huge funds and heavy cost and going back or reversing the decision may result in heavy loss and wastage of funds.

So these decisions must be taken after careful planning and evaluation of all the effects of that decision because adverse consequences may be very heavy. The second important decision which finance manager has to take is deciding source of finance. A company can raise finance from various sources such as by issue of shares, debentures or by taking loan and advances.

Deciding how much to raise from which source is concern of financing decision. Mainly sources of finance can be divided into two categories: While taking this decision the finance manager compares the advantages and disadvantages of different sources of finance.

But finance manager prefers a mix of both types. Under financing decision finance manager fixes a ratio of owner fund and borrowed fund in the capital structure of the company.

Factors Affecting Financing Decisions: While taking financing decisions the finance manager keeps in mind the following factors: The cost of raising finance from various sources is different and finance managers always prefer the source with minimum cost.

Finance manager compares the risk with the cost involved and prefers securities with moderate risk factor. The cash flow position of the company also helps in selecting the securities.

If existing shareholders want to retain the complete control of business then they prefer borrowed fund securities to raise further fund.

Firm prefers securities which involve least floatation cost. State of Capital Market: The conditions in capital market also help in deciding the type of securities to be raised.

During boom period it is easy to sell equity shares as people are ready to take risk whereas during depression period there is more demand for debt securities in capital market. This decision is concerned with distribution of surplus funds. The profit of the firm is distributed among various parties such as creditors, employees, debenture holders, shareholders, etc.

Payment of interest to creditors, debenture holders, etc.Fundamental Decisions In Financial Management. Financial Management Decisions David Pitman Note Final Paper – “Financial Management Decisions” OMP Finance for Managers, taught by Professor Romine June 30, Thesis Without sound financial management decisions a company will flounder and if a firm cannot maintain a satisfactory level of working capital, it is likely to become.

Sep 11,  · The three types of financial management decisions are capital budgeting, capital structure, and working Some case Dividend decision is also part of financial management .

Fundamentals of Financial Management, Thirteenth Edition Eugene F. Brigham and Joel F. Houston VP, Editorial Director: and that hand leads them to decisions that benefit society.

Fundamental decisions in financial management

Smith’s insights led him to con- leading financial institutions saw a huge drop in their stock price, some failed and went out of business, and many Wall. Finance decisions: Determining how the firm should finance or pay for assets. 3. Working capital management decisions: Determining how day-to-day financial matters should be managed so that the firm can pay its bill and how surplus cash could be invested.

The long-term investment decision is referred to as the capital budgeting and the short-term investment decision as working capital management. Capital budgeting is the process of making investment decisions in capital expenditure. The financial manager in a small business is a key decision maker, often the second most important decision maker in the organization besides the owner.

He makes daily decisions that affect the.

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