Financial Functions-, business function1.pptx

Finance function

1. Financial Functions based on Decisions

2. Types of Finance Functions There are different classifications for finance functions. Financing Decision Investing Decision Dividend Decision Liquidity Decision

3. Financing decision Expertise in forming financing decisions leads to optimized capital structure, enhanced performance, and growth. Financing functions deal with acquiring capital (like when and how) for the various functioning of the entity, like whether to use equity capital or debt to finance business events. The debt and equity mix of an entity are called its  capital structure . The financing decisions always focus on maintaining good capital structure.

4. Capital Structure can be calculated as debt-equity ratio i.e. Debt / Equity or as the proportion of debt out of the total capital i.e. Debt / (Debt +Equity). Here, Debt = total outside liabilities of the business, and Equity = total shareholders' funds

5. Investment decision The investment decision function revolves around capital budgeting decisions. Capital budgeting in an organization involves the analysis of investment opportunities, specifically long-term projects, and associated  cash flows , to determine the profit potential. They revolve around making a sound investment that must ripe sufficient and sometimes maximum returns for the business in the long run. Hence these decisions are challenging and complex.

6. Dividend decision Companies share profits with their  shareholders  in the form of dividends. There are different types of shares, shareholder’s dividends, and  dividend policies . Furthermore, a company’s dividend policy influences the company’s market value and stock prices. Hence dividend decision, including the division of  net income  between  dividends  and  retained earnings , is an important function.

7. Liquidity decision Liquidity decision generally revolves around working capital decisions and management . The lack of liquidity results in issues like financial crisis and insolvencies. At the same time, a lot of liquidity can also lead to bigger trouble. Hence, it is important to have the right mix of current assets and current liabilities.