Finance for Decision Making

The Financing Decision is a vital choice made by the financial manager, which concerns the mix of funding for an organization. It involves determining how to borrow and allocate funds necessary for the company's investment decisions. The sources of funding for this decision are the company's own resources, such as share capital and retained earnings, and external borrowings, such as debentures, loans, and bonds. The goal is to achieve an optimal balance in the capital structure.

?What are the Basic Financial Decisions?

?Basic Financial Decisions that financial managers need to take:

• Investment Decision
• Financing Decision and
• Dividend Decision

?Investment Decision

?The Investment Decision also referred to as Capital Budgeting Decision is a crucial choice that requires careful analysis. A company's assets and resources are limited and must be allocated judiciously. The objective is to select investments with the highest potential returns. This decision involves the careful selection of assets in which the company will invest its funds.?

?Factors Affecting Investment Decision

• Cash flow of the venture: If an organization starts a venture it begins to invest a large amount of capital at the initial stage. Though, the organization expects at least a source of income to meet daily expenses. Hence, within the venture, there must be some regular cash flow to sustain.
• Profits: The fundamental criterion to starting a venture is to generate income but moreover profits. The most crucial criteria in choosing the venture involve the rate of return for the organization with respect to its profit nature. For example: if venture A gets 10% return and venture В gets 15% return then project B must be preferred.
• Investment Criteria: Various Capital Budgeting procedures are used for a business to assess various investment propositions. Most importantly, they are based on calculations with respect to investment, interest rates, cash flows, and rate of returns associated with propositions. These are applied to the investment proposals to decide on the best proposal.

?Financing Decision

?Financial decisions are critical choices made by business leaders. They require careful analysis and planning. These decisions involve determining when, where, and how a company should acquire funding. An organization's growth and increase in share value not only signifies progress for the firm but also enhances the wealth of its investors.?

?Factors Affecting Financing Decisions

• Cost: Financing decisions are based on the allocation of funds and cost-cutting. The cost of fundraising from different sources differs a lot and the most cost-efficient source should be chosen.
• Risk: The dangers of starting a venture with funds differ based on various sources. Borrowed funds have a larger risk compared to equity funds.?
• Cash flow position: Cash flow is the daily earnings of the company. A good cash flow position gives confidence to the investors to invest funds in the company.
• Control: In this case where existing investors hold control of the business and raise finance through borrowing money; however, equity can be utilized for raising funds when they are prepared for diluting control of the business.
• Condition of the market: The condition of the market plays a major role in financing decisions. Issuance of equity is in majority during the boom period, but the debt of a firm is used during a depression.?

?Dividend Decision

?Dividend decisions relate to the distribution of profit that is earned by the organization. The main criteria in this decision are whether to distribute to the shareholders or retain the earnings. Dividend decisions are affected by the earnings of the business, and dependency on earnings.

?Importance of Financial Decision Making

1. Long-term Growth and Effect:

Financial decisions are concerned with the long-term use of assets. These assets are very helpful in the process of production. Profit is also earned by selling the goods that are produced. This can, therefore, be an accurate decision. The greater the growth of the business in the long run, the more effective the decision needs to be. In addition to that, these affect the prospects of the business.

2.??????????????????Large Amount of Funds Involved:

Funds are the basis of this business decision. Decisions regarding fixed assets are included in the context of capital budgeting. A huge amount of capital is invested in these assets. If these decisions turn out to be a flaw, then it will cause a heavy loss of capital which is indeed a scarce resource.

3.??????????????????Risk Involved:

Capital budgeting decisions come with risks. There are two reasons for the risk factor to be involved in it. First, these decisions are analyzed over a long period, and thus the expected profits for several years are to be anticipated, which even leads to fluctuations. These are human estimations that may turn out to be wrong. Secondly, as a heavy investment is involved, it is very difficult to change the decision once it has been taken.

4.??????????????????Irreversible Decisions:

The nature of these decisions is irreversible, once taken it cannot be reformed. For instance, if soon after setting up a sugar mill, the owner thought of changing it, then the old machinery used for the purpose and other fixed assets will have to be sold at a loss. In doing this, a heavy loss will have to be incurred by the owner.

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A business is composed of two essential elements: money and the decisions that keep it running smoothly. Without money, a company cannot survive, and without decisions, money cannot be effectively utilized. The success of a business is heavily dependent on the countless decisions made by its management, particularly those concerning money. These decisions are known as Financing Decisions