Managerial finance functions, Finance Basics

Managerial Finance Functions

Require skilful execution, control and planning of financial activities.  Hence there are four significant managerial finance functions. Such are as:

a) Investment of Long-term asset-mix decisions

These decisions as referred to as capital also budgeting decisions relates to the allocation of funds among investment projects. They refer to the firm's decision to consign recent funds to the purchase of fixed assets in expectation of future amount inflows from these projects.  Investment proposals are assessed in terms of both expected and risk return.

Investment decisions concerns to recommitting funds also whenever an old asset becomes less productive.  This is referred to like replacement decision.

b) Financing decisions

Financing decision submits to the decision on the sources of funds to finance investment projects.  The finance manager could decide the proportion of debt and equity.  The mix of debt and equity affects the firm's cost of financing with the financial risk.  Further this will be discussed within the risk return trade-off.

c) Division of earnings decision

The finance manager must decide where the firm should distribute all profits to the shareholders, retain them, or retain a portion and distribute a portion.  The earnings must be distributed to other providers of funds such as preference shareholder also, and debt providers of funds such as preference shareholders and debt sources.  The firm's dividend policy may influence the determination of the value of the firm and since the finance manager must decide the optimum dividend - payout ratio thus as to maximize the value of the firm.

d) Liquidity decision

The firm's liquidity refers to its capability to meet its current obligations as and whenever they fall due. It can as well be referred to as current assets management.  Investment in current assets affects the firm's liquidity, risk and profitability.  The more current assets a firm has, the more liquid it is. This implies such the firm has a lower risk of becoming insolvent since current assets are non-earning assets the profitability of the firm will be low.  The converse will hold accurate.

The finance manager should improve sound techniques of managing current assets to ensure that neither unnecessary nor insufficient funds are invested in current assets.

Posted Date: 1/29/2013 12:53:59 AM | Location : United States







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