Common Managerial Finance Functions

Common Managerial Finance Functions

Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. Managerial finance functions are functions that require managerial skills in their planning, execution, and control. Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique. The managerial finance functions are as follows:

(A) Investment Decision

Investing decision is the managerial decision regarding investment in long-term proposals. It includes the decision concerned with acquisition, modification, and replacement of long-term assets such as plant, machinery, equipment, land, and buildings. One of the most important finance functions is to intelligently allocate capital to long term assets. Long term assets require a huge amount of capital outlay at the beginning but the benefits are derived over several periods in the future.

Following are the two aspects of investment decision

  1. Evaluation of new investment in terms of profitability,
  2. Comparison of cut off rate against new investment and prevailing investment.

Because the future benefits are not known with certainty, long-term investment proposals involve risks.  The financial manager accepts the proposal only if the investment maximizes the shareholder’s wealth.

(B) Financing Decision

Financing decision which is also known as capital structure decision is concerned with determining the sources of funds and deciding upon the proportionate mix of funds from different sources.  It calls for raising of funds from different sources maintaining appropriate mix of capital.

The sources of long-term funds include equity capital and debt capital. The financial manager should decide an optimal structure of debt and equity capital.

(C) Dividend Decision

Dividend decision is the decision about the allocation of earnings to common shareholders. It is concerned with deciding the portion of earnings to be allocated to common shareholders. The net income after paying preferred dividends belongs to common shareholders. The financial manager has three alternatives regarding dividend decision:

  • Pay all earnings as a dividend
  • Retain all earnings for reinvestment
  • Pay certain percentage of earning and retain the rest for reinvestment.

The financial manager must choose among the above alternatives. The choice should be optimum in the sense that it should maximize the shareholder’s wealth. While taking dividend decisions, the financial manager should consider the preference of shareholders as well as the investment opportunities available to the firm.

(D) Working Capital Decision

Working capital decisions refer to the commitment of funds to current assets and deciding on their financing pattern. It refers to the current assets investment and financing decision. Liquidity refers to the capacity to meet a short-term obligation of the firm. At the same time, more investment in current assets negatively affects the profitability because current assets earn nothing or they earn much less than their cost of capital. So, a financial manager should achieve a proper trade-off between liquidity and profitability which requires maintaining optimal investment in current assets.

 

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