Managerial Decision Mix.27th February 2021
Investment decision: It is related to capital mix. Firms have scarce resources that must allocated among competitive uses. The financial management provides a framework for firms to take these decisions wisely. The investment decision includes not only those that creates revenues and profits (ex. Introducing product line), but also those that save money (ex. Introduce a more efficient distribution system). The investment decision is the decision related to assets composition of the firm. Investment decision deals with the size and composition of the asset side of the balance sheet. It is also divided into capital budgeting decision (related to fixed asset) and Working capital management (related to current asset).
a) Capital Budgeting: It deals with the size and composition of the fixed assets. The fixed assets of a firm are the primarily determinants of the profitability of the firm. The objective of the capital budgeting decision is to identify those assets which are worth more than their cost. A financial manager therefore has to take utmost care in dealing with the decision.
b) Working capital management: It deals with the management of the current assets of the firms. Though the current asset do not contribute directly to the earnings, yet their existence is necessities for the proper, efficient and optimum utilization of fixed assets. There are the problems of both the excessive working and adequate working capital to the firm. This decision include how much and what inventory to be maintained and how much credit to be given to the customers.
Financing decision: It deals with the financing patterns of the firms. As firms make decisions concerning where to invest resources. They also have to decide how they should raise resources. There are two main resources of finance for any firm, that is shareholders’ funds and the borrowed funds. These sources have their own characteristics. The key distinction between these two resources that the borrowing funds are always repayable but the shareholders’ funds are not always repayable. firms usually adopt a policy of employing both borrowing funds as well as the shareholders’ funds to finance their activities. The employment of these funds in the combination is also known as Financial Leverage. Every such combination has its own implications.
The Dividend Decision: It deals with the appropriation of after-tax profits. These profits are available to be distributed among the shareholders, Or can be retained by the firm for reinvestment within the firm. Every firm, whether it is small or large, have to decide how much of the profits should be reinvested back in the business. And how much should be taken out in form of dividends. these activities are coming under Profit allocation. The distribution of the profits by any firms is required to satisfy the expectation of the shareholders. The profits can be distributed to shareholders either as the Revenue income(ex. expenditure) or as capital receipt(ex. Bonus share). In this attempt the manager has to look into the fund’s requirements of the firms and the shareholders’ interests. so, these are the financial managerial decisions in asset mix, capital mix and profit allocation.