Managerial Decision Mix
Investment decision: It is related the capital mix. Firms have limited resources that must be put to competitive purposes. Financial management offers organizations with a foundation for making informed choices. Investment decisions include not just those that generate income and profits (for example, introducing a new product line), but also those that save money (for example, implementing a more efficient distribution system). The investment choice relates to the firm’s asset mix. Investment decisions are made based on the size and mix of the asset side of the balance sheet. It is also separated into two categories: capital budgeting decisions (fixed assets) and working capital management (current assets).
- a) Capital Budgeting: Considers the quantity and composition of fixed assets. A firm’s profitability is mostly determined by its fixed assets. The capital budgeting decision aims to discover assets that are worth more than their cost. A financial manager must consequently proceed with extreme caution while making this selection.
- b) Working capital management: This involves managing the firm’s present assets. Though current assets do not immediately contribute to profits, their presence is required for the appropriate, efficient, and optimal use of fixed assets. There are issues with both excessive and appropriate operating capital in the company. This choice includes how much and what kind of inventory to keep, as well as how much credit to provide consumers.
Financing decision: It is concerned with the financing patterns of the companies. Firms make judgments on where to spend resources. They also need to determine how to generate funds. There are two basic sources of money for each company: shareholder cash and borrowed capital. These sources have distinct properties. The essential contrast between these two resources is that borrowing money are always repayable, while shareholder funds are not. Firms often finance their operations using both borrowed capital and shareholder funds. The use of these money in the combination is also referred to as financial leverage. Every such combination has unique effects.
Dividend Decision: It addresses the appropriation of after-tax earnings. These gains might be given to shareholders or maintained by the corporation for internal reinvestment. Every company, whether small or big, must determine how much of its revenues should be spent back into the business. And how much should be taken out as dividends? These actions fall under profit allocation. Any firm’s profit distribution must meet the expectations of its shareholders. Profits may be dispersed to shareholders in the form of revenue income (ex. spending) or capital receipts (ex. bonus shares). In this endeavor, the management must consider the fund’s criteria for enterprises as well as the interests of shareholders. So, these are the financial management choices about asset mix, capital mix, and profit allocation.