question_answer

The role of financial management cannot be under estimated, since it has a direct bearing on the financial health of a business. The importance of financial decisions can be judged by the fact, that almost all items of financial statements are affected by them. In the light of the above, explain the functions of financial management.

Answer:

The functions of financial management relate to three major decisions which every finance manager has to take. The three essential functions of financial management are: (i) Investment Decision This decision relates to careful selection of assets in which funds will be invested by the firms. A firm has many options to invest their funds but firm has to select the most appropriate investment which will bring maximum benefit for the firm and deciding or selecting most appropriate proposal is investment decision. (ii) Financing Decision Finance manager has to take this decision by deciding the source of finance company can raise finance from various sources, i.e. by issue of shares, debentures or by taking loans and advances. Deciding how much to raise from which source is the concern of financing decision. The main sources of finance can be divided into two categories which are given below: [a] Owner's fund             [b] Borrowed fund (iii) Dividend Decision This decision is concerned with distribution of surplus funds. The profit of the firm is distributed among various parties, such as creditors, employees, debenture holders, shareholders, etc. The surplus profit is either distributed to equity shareholders in the form of dividend or kept aside in the form of retained earnings. Under dividend decision, the finance manager decides, how much to be distributed in the form of dividend and how much to keep aside as retained earnings.