Types of FinanceFunctions
There are different classifications for finance
functions.
1. Financing Decision
2. Investing Decision
3. Dividend Decision
4. Liquidity Decision
4.
• Financing decision
Expertisein forming financing decisions leads to
optimized capital structure, enhanced performance,
and growth. Financing functions deal with acquiring
capital (like when and how) for the various
functioning of the entity, like whether to use equity
capital or debt to finance business events. The debt
and equity mix of an entity are called its capital
structure. The financing decisions always focus on
maintaining good capital structure.
5.
Capital Structure canbe calculated as debt-
equity ratio i.e. Debt / Equity
or
as the proportion of debt out of the total
capital i.e. Debt / (Debt +Equity).
Here, Debt = total outside liabilities of the
business, and Equity = total shareholders'
funds
6.
• Investment decision
Theinvestment decision function revolves around
capital budgeting decisions. Capital budgeting in an
organization involves the analysis of investment
opportunities, specifically long-term projects, and
associated cash flows, to determine the profit
potential. They revolve around making a sound
investment that must ripe sufficient and sometimes
maximum returns for the business in the long run.
Hence these decisions are challenging and complex.
7.
• Dividend decision
Companiesshare profits with their shareholders in
the form of dividends. There are different types of
shares, shareholder’s dividends, and dividend
policies. Furthermore, a company’s dividend policy
influences the company’s market value and stock
prices. Hence dividend decision, including the
division of net
income between dividends and retained earnings,
is an important function.
8.
• Liquidity decision
Liquiditydecision generally revolves
around working capital decisions and
management. The lack of liquidity results in
issues like financial crisis and insolvencies. At
the same time, a lot of liquidity can also lead
to bigger trouble. Hence, it is important to
have the right mix of current
assets and current liabilities.
