Question

Explain the financial Manager's critical areas of decision-making. Under each area of critical decision-making, identify two

questions the manager must ask him/herself and answer in the process of decision-making.

Answer 1

Financial decision making is an important process because it is related to fund borrowing and allocation in the best possible manner so that maximum revenues are generated.

In the following areas finance manager takes decisions :

- Capital Structuring or Restructuring (Procurement of funds)

First, the most important decision for a finance manager is the process of procurement of funds. Following are several questions that would raise in his minds :

(1) How to arrange for funds? What will be the ratio of owners capital vis a vis borrowed capital from outside? Debt: equity ratio decision.

(2) What is the cost of borrowing in each case of debt or equity? This will help to find out the adequate weighted average cost of capital.

This in the initial stage, this is the primary function of the finance managers. Later as per situation, they can also restructure the same.

- Capital Budgeting or investments ( Application of funds)

After procurement, the next step is to decide the application of funds to generalise maximum returns.

Following case would arise in his mind:

(1) How much fund to be invested for the long term and short term tenor?

(2) Ratio of secured and unsecured lending. What should be loan advanced without any security and how much to be advanced against any security to decide the leverage condition of the companyy?

Thus the proper allocation of fund is also important to earn more returns with limited risk.

- Working capital management ( Tracking of inflows and outflows of cash)

Regular tracking of movement of cash is important.

Questions that would arise in mind of financial managers are :

(1) What is my liquidity position? Do I have adequate current assets to pay off my current liabilities and future uncertainties?

(2) Is my cash outflow more than cash inflow? If yes than cost control strategies to be used for it.

- Dividend distribution ( Deciding the return on investment)

Return on investment is important for not only to investors but also for the company to show where it is standing on parameters of profit.

Following questions would arise in the mind of managers :

- What is profit and EPS to decide the dividend payment?

- Whether to pay dividends out of cash reserves or from retained earnings.