Learn with steem||Financial management cont'd||Financial functions explained (lesson two)

INTRODUCTION

This post encompasses the explanation of the financial functions listed in the my previous lesson. For clearer understanding, you have to know what Financial management is all about which you can find in my previous post, here is the link to the post; Nature and Scope of Financial Management.

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I took my time to explain the the meaning, nature and scope of financial management which helped us in building a foundational understanding of financial management.

Today we will be looking at the 4 functional decision involved in Financial management.

• Investment decision
• Financing decision
• Dividend decision
• Liquidity decision

INVESTMENT DECISION

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Investment decision is also know as capital budgeting. It involves the screening and selection of investment proposals. A capital budgeting decision (Investment decision) involve the decision of funds allocation to long term assets that will yield cash flows in he future.

There are two important aspects of investment decision;

• The evaluation of the prospective profit of the new Investment.

• The measurement of a cut rate or risk against the prospective retention or return of the new investment.

Future profit of a new investment can be very difficult to measure and can not be predicted with certainty. Risk in Investment arises because of its uncertain returns. Therefore, investment proposals should be evaluated in terms of expected returns and risk.

Long-term investment decision maybe both internal and external. It is the role of the financial manager to determine capital expenditure project to be undertaken, the amount of funds to be committed, and ways in which the funds should be allocated amongst different investment outlet.

FINANCING DECISION

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This is the second important function performed by the financial management. The manager must decide when, where, and how to acquire fund to meet the firm's Investment need.

The major issue faced by the manager is how to determine appropriate proportion of equity and debt. The mix of equity and debt is known as the firm's capital structure.

Therefore the financial manager must strive to obtain the best financing means or the optimum capital structure for the firm. The firm's capital structure is considered optimum when the market value of shares is maximized.

DIVIDEND DECISION

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This refers to the decision involving profit distribution. It is the decision of the financial manager, whether the firm should distribute all profit or retain them or distribute a portion of the profits and retain the balance.

The optimum dividend policy is to maximize the market value of the firm's share. The financial manager must determine the optimum dividend payout ratio.

LIQUIDITY DECISION

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This refers to decision on amount of assets invested current asset should be managed to save guide the firm from dangers of liquidity and insolvency.

Investment in current assets affects firm profitability. A conflict exist between profitability and liquidity while managing current assets, if the firm does not invest funds efficiently and current assets, it may become illiquid or insolvent.

TYPES OF FINANCING MEANS

DEBT FINANCING: This is a means of financing the firm's Investment from borrowing funds.

EQUITY FINANCING: This is a means of financing the firm's investment from the sales of shares.

Adopting both financing means is the best and it helps to build a well balance capital structure.

CONCLUSION

The importance of finance and a financial manager in a business cannot be overemphasized. The functions of a financial manager and one that are very essential in a business which are; Investment decision, financing decision, dividend decision, and liquidity decision. These are four important functions of a financial management. Every business needs a proper Financial Management to enable its growth.

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