Every manager has to take three major decisions while performing the finance function. Explain them.

The three main financial decisions which are generally taken by a finance manager are as under: (i) Investment Decision: It refers to the selection of assets in which funds will be invested by the business. Assets which are obtained by the business are of two types, i.e., long-term assets and short-term assets. On this basis, investment decision is also divided into two parts:

(a) Long-term Investment Decision: This is referred to as the Capital Budgeting Decision. It relates to the investment in long-term assets. For example, buying a new machine. For the same purpose, the finance manager has to make a comparative study of various alternates available in the market on the basis of their cost and profitability. These decisions are very important as they affect the earning of the business over the long run.

(b) Short-term Investment Decision: This is referred to as the Working Capital Management. It relates to the investment in short-term assets, such as, cash, stock, debtors, etc. Finance manager has to ensure that there is sufficient investment in these assets as they affect the liquidity position of the business. For the same purpose, the relative profitability and liquidity of these assets are compared.

(ii) Financing Decision: It refers to the determination as to how the total funds required by the business will be obtained from various long-term sources. Long-term financial sources chiefly include equity share capital, preference share capital, retained earnings, debentures, long-term loan, etc. For taking financing decision, an analysis of the cost and benefits of all the sources is made.

(iii) Dividend Decision: It refers to the determination of how much part of the earning should be distributed among shareholders by the way of dividend and how much should be retained for meeting future needs as retained earnings.