Business Studies · Ch 11 — Financial Management
Financial Decisions
Financial Decisions
The three major financial decisions a firm must make correspond to the three fundamental questions of finance: where to invest, how to raise the money, and how much profit to return to owners. These are the investment decision, the financing decision, and the dividend decision. Every other financial activity ultimately serves one of these three.
Investment Decision
This decision answers: "Where should the firm put its scarce funds to earn the best possible return for investors?" It covers both long-term investment (Capital Budgeting) and short-term investment (Working Capital) choices. See the 9.5.1 Investment Decision section for the full detail, including the factors that affect capital budgeting decisions.
Financing Decision
This decision answers: "How should the firm raise the money it needs?" — the choice between shareholders' funds and borrowed funds, which determines the firm's overall cost of capital and financial risk. See the 9.5.2 Financing Decision section for the full detail, including the factors that affect the choice between debt and equity.
Dividend Decision …
Drawn by us to help you understand the concept clearly, and verified to make sure it's accurate. For exams, practice from your textbook's own diagram.
Our own classification-tree rendering of the real page's illustration: a Chief Financial Officer's role branches into three decisions — the Investment Decision (Capital Budgeting for long-term assets, and Working Capital for cash, inventory and receivables), the Financing Decision (raising Debt from financial institutions and commercial banks, or raising Equity), and the Dividend Decision (splitting Profit between Retained Earnings that are reinvested and Dividends paid out to shareholders). …