Q.Financial management is based on three broad financial decisions. What are these?

The Three Financial Decisions: An Intuitive Start

Imagine you have ₹100 in your pocket. What can you do with it? You could spend it on a movie ticket today. You could put it in a piggy bank and spend it next week. Or you could use it to buy a small packet of seeds, plant them, and hope they grow into a tree that gives you fruit for years.

That's the core of finance — every choice you make with money boils down to three fundamental decisions. Let's build them one by one.

Decision 1: The Investment Decision (What to buy with money)

This is the "what do I own?" question. When you have money, you must decide which assets to put it into. An asset is anything that can hold or generate value — a share of stock, a piece of land, a bond, or even your own education.

The key tension here is risk vs. return. A fixed deposit in a bank is safe but gives you ~6% return. A startup investment might give you 10x return — or wipe out your entire money. The investment decision is about choosing which assets match your willingness to take risk and your time horizon.

Decision 2: The Financing Decision (Where does the money come from?)

Now flip the question. Instead of "what do I buy?", ask "how do I pay for it?" You want to buy a house worth ₹50 lakh. You have ₹10 lakh saved. The remaining ₹40 lakh must come from somewhere — a bank loan, borrowing from family, or issuing shares if you're a company.

This is the financing decision: choosing the mix of your own money (equity) vs. borrowed money (debt).

The trade-off here is cost vs. control. Debt (loans) costs interest, but you keep full ownership. Equity (selling a stake) costs no interest, but you give up some control and future profits. Companies call this the capital structure decision.

Decision 3: The Dividend Decision (What to do with profits)

You've made money. Now what? Do you distribute it to yourself (or shareholders) as cash? Or do you reinvest it back into the business to grow further?

This is the dividend decision: how much profit to keep vs. how much to pay out.

The tension here is current consumption vs. future growth. If you pay out all profits as dividends, you enjoy the money now but the business doesn't grow. If you reinvest everything, you might build a much larger business — but you get no cash today. Companies call this the payout policy.

The Precise Statement

In corporate finance, these three decisions are formally defined as: