Decision areas in financial management

1. Jesitha Jayson
S2 MBA
BRIM
Decision area of Financial
Management

2. ScopeofFinancialManagement
The approach to the scope of financial management is divided into three broad
categories:
a)Traditional approach
b)Transitional approach
c)Modern approach-The finance function covers both acquisition of funds as well as
allocations.
• According to this approach there are three major areas where financial management
focuses its attention ,constitute the scope of financial management:

3. Threemajorareas:
Financin
g
decision
Investme
nt
decision
Dividend
decision

4. 1.Investmentdecision
The investment decision relates to the selection of assets in which funds will be invested by a firm.
The assets which can be acquired are of two types:
i)Long term assets : which yields a return over a period of time in future.
The financial decision making concerned with regard to long term asset is called CAPITAL
BUDGETING
ii)Short term assets /Current assets : which can be converted into cash within a short period.
The financial decision making concerned with regard to short term asset is called WORKING
CAPITAL MANAGEMENT.

5. Concerned with the selection of an asset or an
investment proposal whose benefit are likely to be
available in future over the lifetime of the asset.
It consists of evaluation of different alternative projects
with a view to select the best investment proposal.
Capitalbudgeting

6.  Concerned with the management of current assets.
 If the firm doesnot invest sufficient funds in current assets,it may
not be able to meet its current obligation in time.
 Liquidity is to be adversely affected.
 If current assets are too large ,it will adversely affect the
profitability.
 Therefore,there should be a trade-off between liquidity and
profitability.
WorkingCapital
Management

7. This is concerned with financing –mix or capital structure or leverage
The financing of a firm relates to the choice of the proportion of different sources to finance
the investment requirements.
There must be proper balance between equity and debt.
This is necessary to have a trade-off between risk and return to shareholders.
A capital structure with a reasonable proportion of debt and equity is called OPTIMUM
CAPITAL STRUCTURE .
2.Financialdecision

8.  The dividend should be analysed in relation to the financing decision of the firm.
 There are two alternatives available to a company for dealing with profits- whether to distribute to shareholders
in form of dividend or to retain in the business itself.
 If the whole amount of profits are distributed as dividends,the company may fall into trouble in future because
it may have to entirely depend on external funds which are costly.
 If major shares of profits are retained in the business,the shareholder will not get satisfactory return on their
investment.
 While taking dividend decisions ,both factors company’s financial health and shareholders’ wealth must be
considered.
3.Dividenddecision

9. Thankyou