Financial Decisions (2024)

Financial Decisions (1)

Managers about an organisation’s finances take financial decisions. Investment decisions are immense decisions involved in financial matters.

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Financial decisions are the decisions taken by managers about an organization’s finances. These decisions are of great significance for the organization’s financial well-being. The financial decisions pertaining to expenditure management, day-to-day capital management, assets management, raising funds, investment, etc. The assets and liabilities of the organisation are affected by financial decisions. Undertaking efficient financial decisions can lead to immense revenue over a long term period. Investment decisions are significantly immense decisions. Besides this, financing and dividend are also essential aspects of financial decisions. Keep on reading to know more about it, including the various factors affecting financial decisions.

Investment Decisions

Investment decisions pertain to how managers must invest in various securities, instruments, assets etc. These decisions are considered more important than financing and dividend decisions.

Here, the decision is taken regarding how investment should occur in different asset classes and which ones to avoid. It also involves whether to go for short term or long term assets. This decision is taken under the organisational requirements.

Financing Decisions

Managers take these decisions to facilitate financing for the organisation. The relation of financing decisions is to raise equity while reducing debt as much as possible. Often, they are taken in light of the investment decisions.

These decisions must be taken continuously as the organisation needs funds regularly. Financing decisions should not be very rigid to allow room for manoeuvre if an emergency arises or the economic situation changes suddenly.

Dividend Decision

After making a profit, an organisation has to decide how much reward to give to its shareholders. This reward must be given to them in return for their investment in the company’s stock. Giving too little can cause a loss of trust and confidence of shareholders in the organisation. However, giving too much would reduce the profit margin of the organisation. So, an optimum balanced dividend decision must be taken in this situation.

These decisions involve how many profit portions to hand over to the shareholders in dividends. It also consists of the timing of giving dividends to the shareholders. An excessive delay in giving dividends would be bad for the reputation of the organisation in the eyes of the shareholders and the public.

Factors Affecting Financial Decisions

Let’s look at the factors affecting investment, financing, and dividend decisions.

Factors Affecting Investment Decisions:

  • Capital budgeting- The evaluation of investment proposals must occur by techniques of capital budgeting. This means considering factors like rate of return, interest rate, investment amount, etc.
  • Cash flows of the project- A proper estimation must be made of the expected cash receipts and payments during the entire tenure of an investment proposal.
  • Rate of return- The expected returns from an investment proposal must be considered.
  • Factors Affecting Financing Decision:
  • Cost- The cost of raising funds varies from one source to another. For example, equity is generally more expensive than debt.
  • Cash flow position- A good cash flow position means ease in using borrowed funds.
  • Economic condition- Finances can be raised easily during an economic boom, while a recession makes it hard to raise finances.
  • Risk- The risk associated with various financing sources is not the same. Borrowed funds involve more risk than the owner’s fund as interest.
  • Flotation cost- This is the cost involved in issuing securities like expenses on the prospectus, the fee of underwriting, and the commission or brokerage.
  • Factors affecting Dividend Decision:
  • Preference of shareholders- Shareholders’ preferences must be considered when deciding the dividend amount. If this amount falls too below the shareholders’ expectations, the organisation’s reputation will be affected. This is a risk that every organisation must avoid.
  • Earnings- High dividend rate can be declared by organisations with stable earnings.
  • Dividends stability- Organizations try to stabilise dividends as much as follows. As such, no altering in dividend share should occur due to small or minor changes.
  • Taxation policy- A high tax on dividends would mean that organisations would do lower dividend payouts generally. The situation would be reversed if tax rates were lower.
  • Growth prospects- If the estimated growth prospects of the organisation are good shortly, the number of dividends will be low.
  • Cash flow- When declaring dividends, an organisation must ensure that it has sufficient cash available. As such, the organisation’s cash flow position is a crucial factor to consider.

Conclusion

Financial decisions are the decisions that managers of an organisation make about the finances. These decisions play a huge role in the financial well-being of an organisation. There are three types of financial decisions- investment, financing, and dividend. Managers take investment decisions regarding various securities, instruments, and assets. They take financing decisions to ensure regular and continuous financing of the organisations. The dividend decision has to do with the correct amount of reward to its shareholders. Finally, read the various factors affecting financial decisions.

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Financial Decisions (2024)

FAQs

What are financial decisions? ›

Financial decisions are the decisions taken by managers about an organization's finances. These decisions are of great significance for the organization's financial well-being. The financial decisions pertaining to expenditure management, day-to-day capital management, assets management, raising funds, investment, etc.

What are the 3 types of financial decision-making? ›

When it comes to managing finances, there are three distinct aspects of decision-making or types of decisions that a company will take. These include an Investment Decision, Financing Decision, and Dividend Decision.

Why is financial decision-making important? ›

Strong financial knowledge and decision-making skills help people weigh options and make informed choices for their financial situations, such as deciding how and when to save and spend, comparing costs before a big purchase, and planning for retirement or other long-term savings.

What is a personal financial decision? ›

According to Investopedia, “Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings and retirement planning.” Understanding these terms can help you better control your funds and prepare for future financial success.

What affects financial decisions? ›

Several things can influence your financial decisions. Some of the most common factors that influence financial decisions include age, marital status, employment status, and the number of household members. Certain factors influence financial decisions more than others.

What is financial decisions and controls? ›

Financial controls are the procedures, policies, and means by which an organization monitors and controls the direction, allocation, and usage of its financial resources. Financial controls are at the very core of resource management and operational efficiency in any organization.

What are the four finance functions or decisions? ›

The four major types of financial decisions are investment, liquidity, financial, and dividend decisions.

How to make informed financial decisions? ›

Ask questions about costs and risks. Keep asking more questions until you're sure you understand what you're paying—and what you're getting. How much does this cost now? How much will it cost over time?

What are 5 steps for making financial decision? ›

Plan your financial future in 5 steps
  • Step 1: Assess your financial foothold. ...
  • Step 2: Define your financial goals. ...
  • Step 3: Research financial strategies. ...
  • Step 4: Put your financial plan into action. ...
  • Step 5: Monitor and evolve your financial plan.

What are two main finance activities? ›

Financing activities include: Issuing and repurchasing equity. Borrowing and repaying short-term and long-term debt.

How to improve financial skills? ›

6 ways to improve your financial literacy
  1. Subscribe to financial newsletters. For free financial news in your inbox, try subscribing to financial newsletters from trusted sources. ...
  2. Listen to financial podcasts. ...
  3. Read personal finance books. ...
  4. Use social media. ...
  5. Keep a budget. ...
  6. Talk to a financial professional.

What is financial attitude? ›

Financial attitude is defined as a state of mind, opinion, and judgment of a person about finances [28].

What item is considered a want? ›

Identifying wants

Wants are expenses that help you live more comfortably. They're the things you buy for fun or leisure. You could live without them, but you enjoy your life more when you have them. For instance, food is a need, but daily lunches out are likely more of a want.

What are the golden rules of personal finance? ›

The rule of 25X is the thumb rule when it comes to retirement savings, where you need to save 25 times your annual expenses. This rule says that an individual can think about retirement when they have funds worth 25 times their annual expenses.

How do life stages affect financial decision-making? ›

Age and stage of life affect sources of income, asset accumulation, spending needs, and risk tolerance. Sound personal financial planning is based on a thorough understanding of your personal circumstances and goals.

What are the different types of financial decisions? ›

There are three primary types of financial decisions that financial managers must make: investment decisions, financing decisions, and dividend decisions. In this article, we will discuss the different types of financial decisions that are taken in order to manage a business's finances.

What are strategic financial decisions? ›

Strategic financial management is the process of managing the finances of a company to meet the organisation's goals. It's a management approach that uses financial tools and a mix of techniques to create a strategic plan. It also ensures the strategy is implemented as planned and is achievable in the long term.

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