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Question:

Financial management is based on three broad financial decisions. What are these?

Answer:

Financial management is concerned with optimum procurement as well as usage of finance. It aims at mobilization of funds at a lower cost and deployment of these funds in the most profitable activities. Three broad decisions are:

  1. Investment decision: It relates to how the firm’s funds are invested in different assets, so that the firm is able to earn the highest possible returns on investment. Investment decisions can be long-term or short-term.

  2. Financing decision: It is concerned with the decisions of how much funds are to be raised from which long-term source, i.e. by means of shareholders’ funds or borrowed funds. Shareholders’ funds include share capital, reserves and surplus and retained earnings, whereas, borrowed funds includes debentures, long-term loans and public deposits.

  3. Dividend decision: It relates to how much of the company’s net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements. This decision should be taken, keeping in view the overall objective of maximizing shareholders’ wealth.


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