FINANCIAL DECISIONS AND ITS CLASSIFICATIONS

Financial decisions refer to that decision concerning financial matters of a business firm. There are many kinds of financial management decisions are involved in a business.
We can classify these decisions into three major groups;

  1. Investment decisions
  2. Financing decisions
  3. Dividend decisions

Investment Decisions: Investment decisions refers to the determination of the total amount of assets to be held in the firm. It is the most important financial decision. Since funds involve cost and are available in a limited quantity, its proper utilization is very necessary to achieve the goals of wealth maximization.
It is divided into two groups;

  • Long-term investment decisions
  • Short-term investment decisions.

Long-term investment decisions: Long-term investment decisions refers to the capital budgeting. capital budgeting is helpful for making investment decisions in capital expenditure.
These are expenditure, the benefits of which are expected to be received over a long period of time exceeding one year.
Short-term investment decisions: Short-term financial decisions relates to the allocation of funds as among cash receivable and inventory. This investment decision or working capital management policy is one which ensures higher profitability, proper liquidity and good health of the organization.

Financing decisions: Once a firm takes the investment decision and committed itself to a new investment, it must decide to best mean of financing this commitment. A financing manager has to select such sources of funds which will make an optimum capital structure. If the capital structure is able to minimize the risk and raise the profitability then the market price of the shares will go up maximizing the wealth of shareholder.

Dividend Decisions: The third major financial decision relates to the disbursement of profit back to investors who supplied capital to the firm. The term divided refers to the part of a profit to the company which is distributed by it among its shareholders, It is the reward of shareholders for investments made by them in the share capital of the company.

INTER-RELATION OF FINANCIAL DECISIONS:

We have study above the three major groups of financial decisions. Although these are different kinds of financial management decisions yet these decisions are interrelated because underlying the decisions influence one another.
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