Finance Functions

  1. Financing decisions
  2. Investment decisions
  3. Dividend policy decision
  4. Liquidity Decision

A. Financing Decisions are decisions regarding process of raising the funds. This function of finance is concerned with providing answers to various questions like –

  • What should be amount of funds to be raised.
  • What are the various sources available to organisation for raisaing the required amount of funds? For this purpose, the organisation can go for internal & external sources.
  • What should be proportion in which internal & external sources should be used by organisation?
  • If organisation, wants to raise funds from different sources, it is required to comply with various legal & procedural formalities.
  • What kinds of changes have taken place recently affecting capital market in the country?

B. Investment decisions:- are decisions regarding application of funds raised by organisation. These relate to selection of the assets in which funds should be invested.

The assets in which funds can be invested are of 2 types

  1. Fixed assets:- are the assets which bring returns to organisation over a longer span of time. The investment decisions in these types of assets are “capital budgeting decisions.” Such decisions include
    1. How fixed assets should be selected to make investment ? What are various methods available to evaluate investment proposals in fixed assets?
    2. How decisions regarding investment in fixed assets should be made in situation of risk & uncertainity?
  2. Current assets:- are assets which get generated during course of operations & are capable of getting converted in form of cash with in a short period of one year. Such decisions include
    1. What is meaning of Working Capital management & its objectives?
    2. Why need for working capital orises?
    3. What are factors affecting requirements of working capital?
    4. How to quantity requirements of working capital?
    5. What are sources available for financing the requirement of working capital?

C.Dividend Policy Decisions:- Such decisions include

  • What are forms in which dividend can be paid to share holders?
  • What are legal & procedural formalities to be completed while paying dividend different forms?

D.Liquidity Decisions:- Current assets should be managed efficiently for safe guarding firm against of liquidity & insolvency. In order to ensure that neither insufficient nor unnecessary funds are invested in current assets, the financial manager should develop sound technique of managing current assets.

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