Financial Decisions in Financial Management (2024)

Financial Decisions in Financial Management (1)

What Are Financial Decisions?

Managers make financial judgments when it comes to a company's money. These are critical considerations for the company's financial health. These choices might include asset purchase, finance, fundraising, day-to-day capital, spending management, etc. As a result, financial decisions impact a company's assets and liabilities.

Profits, income, and the reception of finances and help for the firm might all result from them. They may also be in terms of a company's spending, the formation of liabilities, or a money outflow.

Of course, all of these financial choices may be made for the long or short term. Long-term financial decisions are those made for at least a year. Capital planning and investment choices and the raising of long-term capital and loans with times of 5-10 years are examples of these.

Financial choices made for a short period, generally less than a year, are short-term financial decisions. These choices include working capital management, securing short-term money and credits, and paying dividends, among other things.

Accounting and Finance

The stream of management related to financial choices is known as financial management.

Professional managers plan and define objectives, organize and manage financial operations to attain these objectives, and finally execute the control role to assess and, if required, rectify these objectives.

They guarantee that the company's liquidity status is sufficient and that it maintains a solid financial position. These executives are experts in developing and implementing financial strategies and choices for the organization.

Making Investment Choices

Investment choices pertain to the purchase of various sorts of assets, instruments, securities, and other financial instruments. Managers select how to invest the company's assets across multiple asset classes based on the organization's demands.

Short-term and long-term investments are both possible. Because each organization has limited financial resources, choosing which asset to invest in initially. Managers must decide to postpone investing in certain assets that aren't required right now, or that may fail to provide the expected return.

Decisions on Long-Term Investments

Capital budgeting choices are those made to invest in long-term assets to increase the organization's total production/servicing capacity. They often need significant financial investment and are always for a more extended period. As a result, Capex's choices must be made carefully.

Any commitment to such assets is irrevocable and results in a considerable amount of money being blocked. Furthermore, the returns on such investments are pretty late, and it might take a long time, even a year before a positive return is realized. These expenses are examples of the formation of a new unit or the extension of an existing team, the acquisition or replacement of new equipment, investments in research and development, etc.

Investment Decisions for the Short Term

Short-term investment choices affect the company's day-to-day operations and management. It's roughly referred to as the company's working capital management. Managers must guarantee that the firm has enough cash to carry out its daily operations. The administration must ensure that these funds do not run out and that the company's day-to-day operations are not hampered or slowed.

They must also choose short-term finance sources and prioritize expenditures based on the money' availability and urgency. Receivables and payables and the purchase and usage of goods are all examples of short-term investment choices.

Investment Decision-Making Factors

The following are some of the factors that influence investment decisions:

Investment Return on Investment (ROI)

One of the most crucial variables affecting any investment choice is the return on investment.

Managers will put their money into initiatives that offer a greater return on investment and are less risky than others.

Flows of Cash

Managers will prefer to engage in projects with more significant positive cash flows to maintain a stable and comfortable liquidity position.

Capital Availability

The company's investment selections are influenced by the availability of both short-term and long-term resources. Interest rates, payback length, project age, quantum and commencement of return, and other factors all impact the decision to choose one project over another.

Decisions on Funding

Financing choices are those taken to guarantee the company's financial stability, and they have to do with the corporation obtaining both stock and debt to support its investment initiatives. Because each firm needs money regularly, it is a continuing procedure because the demands of a developing organization do not end but rather increase to keep up with the expansion.

Structure of Capital

To build a healthy capital structure, financial managers must make critical judgments. Stock and debt make up a company's capital structure. They must strike the perfect balance between the two to maximize shareholder value and the firm's profitability. Higher equity capital decreases repayment stress since it becomes part of the company's capital. However, more significant returns in dividends are required, resulting in dilution of ownership and voting rights.

On the other hand, debt comprises bank and financial institution loans, debentures, and other similar instruments. High debt burdens the interest load and makes the capital structure riskier. Furthermore, since lenders might recover their money at any moment, the firm cannot depend on this source of funding indefinitely. Any period of poor performance may wreak havoc on the organization and put it under great stress.

Optimal Debt-to-Equity Ratio

Financial managers must determine the best debt-to-equity ratio. They must consider a variety of aspects, including the cost of financing, the risk associated, the floating price in the event of issuing shares, the company's immediate cash-flow condition, the health of the economy, debt and equity markets, and so on.

Decision on Dividends

When a firm generates a profit, it chooses to reward its shareholders in exchange for their investment, trust, and confidence. A dividend is a name for this kind of payment. At the same time, management must decide whether to keep a portion of the earnings for the company's future requirements, and this is referred to as "retained profits."

Managers must make the critical choice of how much of the earnings should be paid out in dividends and how much should be retained by the firm. Increased tips make the stock more appealing, raising the market price and the company's total market worth. However, they must also consider profits and their consistency, the company's growth prospects, cash flow, dividend taxation, and, most importantly, its own financial needs, among other factors.

Getting to Know Finance

Tax systems, government expenditures, budget procedures, stabilization strategies and instruments, debt issues, and other government concerns are all included under the phrase "finance." The administration of a company's assets, liabilities, income, and debts is known as corporate finance.

Personal finance refers to all of a person's or family's financial choices and actions, such as budgeting, insurance, mortgage planning, savings, and retirement planning.

Financial Decisions in Financial Management (2)

Finance's History

In the 1940s and 1950s, the contributions of Markowitz, Tobin, Sharpe, Treynor, Black, and Scholes, to name a few, were crucial in establishing finance as a distinct topic of theory and practice from economics. However, several components of finance have existed in some form or another since the dawn of civilization, such as banking, lending, investing, and money itself.

Banking began in the Babylonian/Sumerian kingdom about 3000 BC, when temples and palaces were utilized as safe havens for financial assets such as grain, animals, and silver or copper ingots. In the country, grain was the chosen money, while in the city, silver was favored.

Hammurabi's Babylonian Code formalized early Sumerian financial transactions (circa 1800 BC). Land ownership or leasing, agricultural labor employment, and credit were all managed by this set of rules. Yes, interest was charged on loans back then, and the rates differed depending on whether the money was borrowed for grain or silver.

Around 1200 BC, cowrie shells were utilized as money in China. In the first millennium BC, money was first formed. Around 564 BC, King Croesus of Lydia (now Turkey) was one of the first to make and distribute gold coins, earning him the nickname "rich as Croesus."

The ancient Greeks identified six distinct forms of loans from the 6th century BC to the 1st century AD, with personal loans charging interest rates as high as 48 percent per month. Option contracts were also available. According to Aristotle, a man called Thales bought the rights to operate olive presses in anticipation of a large olive crop. (He was correct.)

Bills of exchange were established in the Middle Ages to allow people to transport money and make payments across long distances without having to physically move large quantities of precious metals.

Merchants, bankers, and foreign currency brokers in key European commercial hubs like Genoa and Flanders employed them in the thirteenth century.

The Antwerp Exchange, created in 1460, was the earliest financial exchange, trading in commodities and, subsequently, bonds and futures contracts. In the 17th century, the action was relocated to Amsterdam. When the VOC (Vereenigde Oost-Indische Compagnie or United East India Corporation) issued shares that anyone could trade on the newly founded Amsterdam Market, the Western world's first stock exchange, it became the first public business in 1602.

Accounting Innovations

Compound interest, which is calculated on both the principal and previously collected interest, was known to ancient cultures (the Babylonians had a term for "interest on interest," which essentially explains the idea).

Mathematicians did not begin to investigate it until the Middle Ages in order to show how invested sums may accumulate: One of the earliest and most important documents is Leonardo Fibonacci's arithmetical manuscript Liber Abaci, authored in 1202 by Leonardo Fibonacci of Pisa and including pictures juxtaposing compound and simple interest.

Luca Pacioli's Summa de arithmetica, geometria, proportions et proportionality, published in Venice in 1494, was the first complete treatise on bookkeeping and accounting. William Colson provided the first compound interest tables written in English in 1612 in a book on accounting and mathematics.

When Richard Witt published his Arithmetical Questions in London a year later, compound interest was well recognized.

Around the end of the 17th century, interest calculations were combined with age-dependent survival rates to create the first life annuities in England and the Netherlands.

Finances of the State

The federal government prevents market failure by monitoring resource allocation, income distribution, and economic stability. The majority of the money for these initiatives comes from taxes.

The majority of the money for these programs comes from taxes. The federal government is able to support itself via borrowing from banks, insurance companies, and other governments, as well as obtaining revenue from its businesses.

The federal government also helps state and local governments with grants and support. User fees from ports, airport services, and other facilities; fines for breaking the law; revenue from licenses and fees, such as for driving; and sales of government securities and bond issues are all examples of public financing.

Financial Decisions in Financial Management (3)

Finance for Corporations

Businesses may get money in a number of ways, including equity investments and credit agreements. A company could take out a bank loan or set up a line of credit. Correct debt acquisition and management may improve a company's potential to grow and become more profitable.

Angel investors and venture capitalists may invest in a business in exchange for a piece of the company's ownership. If a business succeeds and goes public, it will issue stock on a stock market; initial public offerings (IPOs) bring a large amount of money into a company.

Established corporations may sell more shares or issue corporate bonds to raise funds. Businesses may acquire dividend-paying stocks, blue-chip bonds, or interest-bearing bank certificates of deposits (CDs) to enhance income or buy other businesses.

For example, Gannett, a newspaper publishing company, reported a second-quarter net income of $12.3 million in July 2016, down 77 percent from $53.3 million in 2015. However, Gannett reported much higher circulation figures in 2016 as a consequence of the 2015 purchases of North Jersey Media Group and Journal Media Group, resulting in a 3% rise in overall revenue to $748.8 million for the second quarter.

Finances for Individuals

Personal financial planning examines a person's or a family's present economic situation, forecasting short- and long-term requirements, and putting together a plan to meet those needs within personal financial limits. Personal finance is mainly determined by one's salary, living expenses, and personal ambitions and aspirations.

Purchases of financial commodities for personal use, such as credit cards, life and home insurance, mortgages, and retirement plans, are all examples of personal finance issues. Private banking (for example, checking and savings accounts, IRAs, and 401(k) plans) is also included in personal finance.

Economics vs. Finance

The two disciplines of economics and finance are intricately intertwined, influencing and informing each other. Investors want economic data since it has a substantial influence on the markets. Investors must avoid "either/or" arguments when it comes to economics and finance; both are vital and useful.

The emphasis of economics, particularly macroeconomics, is often on a larger picture in nature, such as how a nation, region, or market is functioning. Finance is more individual, firm, or industry-specific, while economics might concentrate on public policy.

Microeconomics outlines what to anticipate when particular industries, business, or individual factors change. Microeconomics predicts that if a vehicle manufacturer increases its pricing, people will purchase fewer automobiles. Because supply is restricted, copper prices are expected to increase if a significant copper mine in South America closes.

Finance also deals with how companies and investors evaluate risk and return. In the past, economics has been more intellectual, while finance has been more practical, but the divide has narrowed significantly in the last 20 years.

Financial Decisions in Financial Management (4)

Is Finance A Science Or An Art?

Both, in a nutshell, is the solution to this question.

As a discipline of study and a commercial sector, finance has deep roots in allied scientific fields like statistics and mathematics. In addition, many contemporary financial ideas mimic scientific or mathematical calculations.

However, there is no disputing that the financial business has non-scientific characteristics that make it resemble an art form. Human emotions, for example, have been shown to have a significant part in many elements of the financial world (and the actions made as a result of them).

Modern financial theories, such as the Black Scholes model, rely significantly on scientific rules of statistics and mathematics; their development would have been inconceivable if science had not established the foundation.

Furthermore, theoretical constructions such as the capital asset pricing model (CAPM) and the efficient market hypothesis (EMH) aim to analytically explain stock market behavior in an emotionless, perfectly rational way, entirely disregarding market emotions and investor mood.

In Conclusion

Financial choices are at the heart of every company's success. Professional managers' primary goal and primary efficiency is to maximize the company's financial worth/value and that of its stakeholders. They need to boost profitability while keeping the company's liquidity in check.

In addition, the company's risk level should be kept to a minimum. It is their responsibility to create objectives, analyze options, pick the best course of action, execute financial plans successfully, modify, update, and review those plans on a regular basis, and take corrective action when required.

As an enthusiast and expert in the field of finance, let me establish my credibility by delving into the intricate concepts presented in the article on financial decisions. I have a comprehensive understanding of the principles, theories, and historical aspects of finance, which enables me to provide valuable insights and analysis.

The article begins by emphasizing the critical role of financial decisions made by managers in an organization. These decisions encompass a wide range of considerations such as asset purchases, financing options, fundraising, day-to-day capital management, and spending decisions. The consequences of these choices extend to a company's assets, liabilities, profits, income, and overall financial health.

Financial Management: The stream of management related to financial decisions is aptly named financial management. Professionals in this domain plan, organize, and execute financial operations to achieve organizational objectives. They play a crucial role in developing and implementing financial strategies, ensuring liquidity, and maintaining a robust financial position.

Investment Choices: The article highlights the significance of investment decisions, which involve choosing how to allocate a company's assets across various classes. This includes both short-term and long-term investments, with managers aiming to maximize returns while managing risks. Long-term investment choices, known as capital budgeting, require careful consideration due to their irrevocable nature and potential for significant financial commitment.

Factors Influencing Investment Decisions: Several factors influence investment decisions, including the return on investment (ROI), cash flows, and the availability of capital. Managers assess these factors to determine the optimal allocation of resources and prioritize projects that align with the organization's goals.

Financing Choices: Financing decisions are crucial to ensuring a company's financial stability. The article discusses the concept of capital structure, balancing equity and debt to maximize shareholder value. Financial managers must carefully consider various factors, including the cost of financing, risk, and economic conditions, to determine the optimal debt-to-equity ratio.

Dividend Decisions: The article addresses the critical decision of distributing profits to shareholders through dividends. Financial managers must strike a balance between rewarding shareholders and retaining earnings for the company's future needs. This decision involves considerations such as market appeal, growth prospects, cash flow, and taxation implications.

Understanding Finance: The broader scope of finance includes tax systems, government expenditures, budget procedures, and other government-related concerns. Corporate finance involves managing a company's assets, liabilities, income, and debts, while personal finance focuses on individual or family financial choices, including budgeting, insurance, and retirement planning.

Finance's History: A historical perspective reveals the evolution of finance from ancient civilizations to the establishment of financial exchanges, banking systems, and various financial instruments. Notable contributions from figures like Markowitz, Tobin, Sharpe, and others in the mid-20th century played a crucial role in shaping finance as a distinct field of study.

Accounting Innovations: The article briefly touches upon accounting innovations, including compound interest, which has ancient roots. The development of bookkeeping and accounting practices, as seen in works like Luca Pacioli's Summa de arithmetica, paved the way for modern financial management.

Finances of the State: Government finances are discussed, highlighting the role of taxation, borrowing, and other financial instruments in supporting public initiatives. The article also mentions the federal government's assistance to state and local governments through grants and support.

Finance for Corporations: Corporations acquire funds through various means, such as equity investments, credit agreements, bank loans, and stock market offerings. The importance of correct debt acquisition and management in enhancing a company's growth and profitability is emphasized.

Finances for Individuals: Personal finance planning is explored, focusing on an individual's or family's economic situation, needs, and financial goals. The article mentions various personal finance issues, including credit cards, insurance, mortgages, and retirement plans.

Economics vs. Finance: The interconnectedness of economics and finance is highlighted, with both disciplines influencing each other. While economics often focuses on broader macroeconomic trends, finance is more specific to individual firms and industries. The article emphasizes the importance of considering both perspectives.

Is Finance A Science Or An Art? The article concludes by addressing the dual nature of finance as both a science and an art. While grounded in scientific principles such as mathematics and statistics, finance also incorporates non-scientific elements, including human emotions. Theoretical frameworks like the Black-Scholes model demonstrate the integration of scientific rules into financial concepts.

In conclusion, the article provides a comprehensive overview of financial decisions, covering topics ranging from investment choices to historical developments in finance. My expertise allows me to appreciate the nuances and significance of these concepts, making me well-equipped to discuss and analyze various aspects of financial management.

Financial Decisions in Financial Management (2024)


Top Articles
Latest Posts
Article information

Author: Otha Schamberger

Last Updated:

Views: 5895

Rating: 4.4 / 5 (55 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Otha Schamberger

Birthday: 1999-08-15

Address: Suite 490 606 Hammes Ferry, Carterhaven, IL 62290

Phone: +8557035444877

Job: Forward IT Agent

Hobby: Fishing, Flying, Jewelry making, Digital arts, Sand art, Parkour, tabletop games

Introduction: My name is Otha Schamberger, I am a vast, good, healthy, cheerful, energetic, gorgeous, magnificent person who loves writing and wants to share my knowledge and understanding with you.