Managerial Finance Functions
Need skilful planning, control and execution of the financial activities. There are four significant managerial finance functions. These are as shown below:
(a) Investment of Long-term asset-mix choices:
Such decisions (also termed to as capital budgeting decisions) associates to the allotment of funds amongst investment projects. They refer to the firm's choice to commit present finances to the purchase of fixed assets in hope of future cash inflows from such projects. Investment proposals are computed in terms of both risk and predictable return.
Investment decisions also associates to recommitting funds whenever an old asset becomes less productive. This is termed to as replacement decision.
(b) Financing decisions:
Financing decision refers to the decision on the sources of finances to finance investment projects. The finance manager should decide the proportion of fairness and debt. The mix of debt and equity affect the firm's cost of financing an also the financial risk.
(c) Division of earnings decision:
The finance manager should decide whether the firm must distribute all profits to the shareholder, maintain them, or distribute a fraction and retain a portion. The earnings should also be distributed to other providers of funds like preference shareholder, and debt providers of funds like preference shareholders and debt providers. The firm's divided policy might influence the determination of the value of the firm and hence the finance manager should decide the optimum dividend - payout ratio and hence to maximize the value of the firm.
(d) Liquidity decision:
The firm's liquidity refers to its capability to meet its present obligations as and whenever they fall due. It can also be termed as current assets management. Investment in present assets affects the firm's profitability, liquidity, and risk. The more present assets a firm has, the additional liquid it is. Which implies that the firm has a lower risk of becoming insolvent though as current assets are non-earning assets the profitability of the firm will be low? The contrary will hold true.
The finance manager must develop sound methods of managing current assets to make sure that neither inadequate nor unnecessary funds are invested in present assets.