Question

Identify the aspects of finance that you feel you understand best after taking this course. What are some areas in which you believe you may need more training in the future? Explain why you have chosen both the aspects you understand and those you feel require more training and/or information.

Answer 1

Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, and forecasting.

Best understand Three Aspects of Financial Management

1) Investment Decision

The investment decision is a long-term decision and is related to the selection of durable goods or real assets in which funds will be invested by the firm.

The assets which can be acquired are usually divided into two broad categories:

(1) Long-term (or fixed) assets (like plant, equipment and machinery) which will yield a return over a long period of time,

(2) Short-term (or current) assets which can easily be converted into cash within a year’s time.

Thus a firm’s asset selection decision falls into two parts:

(1) Capital budgeting which involves the first category of assets and

(2) Working capital management which is related to decision-making related to short-term (current) assets.

2. Financing Decision:

While investment decision is largely concerned with choosing an optimum mix of assets or with the composition of the fixed a sets of the firm, the second decision, viz., financing decision, relates to the financing-mix or capital structure or leverage.

The term ‘capital structure’ is used to refer to the proportion of debt (fixed-interest securities or outsiders’ capital) and equity capital (variable-dividend securities or owners’ capital).

The average enterprise uses two categories of debt financing; short-term and long-term obligations. Short-term financing represents debts having a maturity of less than one year. In long-term financing the debt obligations are of one year or longer. The financing decision is broadly concerned with the choice of the proportion of these sources to finance the investment requirements.

A capital structure with a judicious mix of debt and equity capital is called a company’s optimal capital structure. Thus one important dimension of the financing decision is ascertaining whether a firm’s capital structure is optimal or not.

There is another aspect of financial decision, viz., the determination of an appropriate capital structure, under existing conditions (in the context of the present financial environment of the company).

Thus the financing decision covers two different, but interrelated aspects, viz.,

(a) Capital structure theory and

(b) Capital structure decision.

3. Dividend Policy Decision:

All decisions relating to the dividend policy constitute the third dimension of modern financial management. This decision is not a separate decision. It has to be analysed in relation to the second decision, viz., and the financing decision. Firms have to make two decisions as far as distribution of net profit after tax is concerned:

(1) Distributing it to the shareholders in the form of dividend and/or

(2) Retaining it in the business. It is not that easy to say which course of action should be followed dividend or retention.

One strategic element of the dividend decision is, therefore, the dividend pay-out ratio which shows what proportion of net profits should be distributed among the shareholders in the form of dividends. The decision depends on two factors, viz., the preferences of the shareholders and investment opportunities available within the firm.

Why Chosen: All the aspects discussed above are relevant and important for the sustainability of each and every business. Proper decision making in this area lead the company to success or failure in the future. Decision making is an important aspect it become more important if its related to finance.

Need more training

Optimal capital structure. The one important dimension of the financing decision is ascertaining whether a firm’s capital structure is optimal or not. to make an optimal capital structure, need in-depth knowledge and skill in financing. Unless the capital structure is proper the stone of the organisation will not be stable.

Theories of capital structure: Proper understanding of those theories will lead to proper decision making and there by success of the organisation as a whole. Case studies will give more apt situational analyzes and can choose the best for organisational decision making.