The following are the three broad categories of financial decisions to be taken by the financial manager in an organisation :
(i) Investment Decision : They take the decision regarding where to invest the funds so as to earn the highest possible returns on investment. These decisions can further be bifurcated into two categories, namely longterm investment decisions and short-term investment decisions.
(a) Long-term investment decision : These are those decisions that affect long-term earning capacity of the business and its profitability. For example, investment in a new machine and purchase of a new building are such decisions. They are also known as 'Capital budgeting decision'.
(b) Short-term investment decision: These are the decisions that affect day-to-day working operation of a business. For example, decisions regarding cash or bill receivables are two such decisions. These decisions are also known as 'Working capital decision'.
(ii) Financing Decision : They take decisions regarding the identification of various sources of funds (as debt and equity) and deciding the best combination among them. These decision are taken on the basis of risk and profitability of various alternatives. Factors affecting financing decision are :
(a) Cost of raising funds : Those sources of funds are preferred that involve minimum cost.
(b) Risk involved : Sources of funds that involve moderate risk are preferred over those that involve high risk. For instance, debt or debentures involve the risk of default payment which must be carefully analysed before taking the debt.
(iii) Dividend Decision : They take the decisions regarding the distribution of profit or surplus of the company. The profits can either be distributed to the shareholders in the form of dividends or retained by the company for future use.