The following explanation will help in understanding each finance function in detail
Investment Decision
One of the most important finance functions is to intelligently
allocate capital to long term assets. This activity is also known as
capital budgeting. It is important to allocate capital in those long
term assets so as to get maximum yield in future. Following are the two
aspects of investment decision
Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. It wise decisions to decompose depreciated assets which are not adding value and utilize those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the required rate of return (RRR)
Financial Decision
Financial decision is yet another important function which a
financial manger must perform. It is important to make wise decisions
about when, where and how should a business acquire funds. Funds can be
acquired through many ways and channels. Broadly speaking a correct
ratio of an equity and debt has to be maintained. This mix of equity
capital and debt is known as a firm’s capital structure. A firm tends to
benefit most when the market value of a company’s share maximizes this
not only is a sign of growth for the firm but also maximizes
shareholders wealth. On the other hand the use of debt affects the risk
and return of a shareholder. It is more risky though it may increase the
return on equity funds. A sound financial structure is said to be one
which aims at maximizing shareholders return with minimum risk. In such a
scenario the market value of the firm will maximize and hence an
optimum capital structure would be achieved. Other than equity and debt
there are several other tools which are used in deciding a firm capital
structure.
Dividend Decision
Earning profit or a positive return is a common aim of all the
businesses. But the key function a financial manger performs in case of
profitability is to decide whether to distribute all the profits to the
shareholder or retain all the profits or distribute part of the profits
to the shareholder and retain the other half in the business. It’s the
financial manager’s responsibility to decide a optimum dividend policy
which maximizes the market value of the firm. Hence an optimum dividend
payout ratio is calculated. It is a common practice to pay regular
dividends in case of profitability Another way is to issue bonus shares
to existing shareholders.
Liquidity Decision
It is very important to maintain a liquidity position of a firm to
avoid insolvency. Firm’s profitability, liquidity and risk all are
associated with the investment in current assets. In order to maintain a
tradeoff between profitability and liquidity it is important to invest
sufficient funds in current assets. But since current assets do not earn
anything for business therefore a proper calculation must be done
before investing in current assets. Current assets should properly be
valued and disposed of from time to time once they become non
profitable. Currents assets must be used in times of liquidity problems
and times of insolvency.
Investment Decision
One of the most important finance functions is to intelligently
allocate capital to long term assets. This activity is also known as
capital budgeting. It is important to allocate capital in those long
term assets so as to get maximum yield in future. Following are the two
aspects of investment decision
- Evaluation of new investment in terms of profitability
- Comparison of cut off rate against new investment and prevailing investment.
Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. It wise decisions to decompose depreciated assets which are not adding value and utilize those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the required rate of return (RRR)
Financial Decision
Financial decision is yet another important function which a
financial manger must perform. It is important to make wise decisions
about when, where and how should a business acquire funds. Funds can be
acquired through many ways and channels. Broadly speaking a correct
ratio of an equity and debt has to be maintained. This mix of equity
capital and debt is known as a firm’s capital structure. A firm tends to
benefit most when the market value of a company’s share maximizes this
not only is a sign of growth for the firm but also maximizes
shareholders wealth. On the other hand the use of debt affects the risk
and return of a shareholder. It is more risky though it may increase the
return on equity funds. A sound financial structure is said to be one
which aims at maximizing shareholders return with minimum risk. In such a
scenario the market value of the firm will maximize and hence an
optimum capital structure would be achieved. Other than equity and debt
there are several other tools which are used in deciding a firm capital
structure.
Dividend Decision
Earning profit or a positive return is a common aim of all the
businesses. But the key function a financial manger performs in case of
profitability is to decide whether to distribute all the profits to the
shareholder or retain all the profits or distribute part of the profits
to the shareholder and retain the other half in the business. It’s the
financial manager’s responsibility to decide a optimum dividend policy
which maximizes the market value of the firm. Hence an optimum dividend
payout ratio is calculated. It is a common practice to pay regular
dividends in case of profitability Another way is to issue bonus shares
to existing shareholders.
Liquidity Decision
It is very important to maintain a liquidity position of a firm to
avoid insolvency. Firm’s profitability, liquidity and risk all are
associated with the investment in current assets. In order to maintain a
tradeoff between profitability and liquidity it is important to invest
sufficient funds in current assets. But since current assets do not earn
anything for business therefore a proper calculation must be done
before investing in current assets. Current assets should properly be
valued and disposed of from time to time once they become non
profitable. Currents assets must be used in times of liquidity problems
and times of insolvency.
