Investment Decision

These are also known as Capital Budgeting Decisions. This decision relates to the careful selection of
assets in which funds will be invested by the firms. The firm puts its funds in procuring fixed assets and
current assets. When choice with respect to a fixed asset is taken it is known as capital budgeting
decision.

Factors Affecting Investment Decision

Cash flow of the venture: When an organization starts a venture it invests a huge capital at the start.
Even so, the organization expects at least some form of income to meet everyday day-to-day expenses.
Therefore, there must be some regular cash flow within the venture to help it sustain.

Profits: The basic criteria for starting any venture is to generate income but moreover profits. The most
critical criteria in choosing the venture are the rate of return it will bring for the organization in the
nature of profit for, e.g., if venture A is getting 10% return and venture В is getting 15% return then one
must prefer project B.

Investment Criteria: Different Capital Budgeting procedures are accessible to a business that can be
utilized to assess different investment propositions. Above all, these are based on calculations with
regards to the amount of investment, interest rates, cash flows and rate of returns associated with
propositions. These procedures are applied to the investment proposals to choose the best proposal.

Financing Decisions

source: badjunko

Financing Decision

Financial decision is important to make wise decisions about when, where and how should a business
acquire fund. Because a firm tends to profit most when the market estimation of an organization’s share
expands and this is not only a sign of development for the firm but also it boosts investor’s wealth.
Consequently, this relates to the composition of various securities in the capital structure of the
company.

Factors affecting Financing Decisions

Cost: Financing decisions are all about allocation of funds and cost-cutting. The cost of raising funds from
various sources differ a lot. The most cost-efficient source should be selected.

Risk: The dangers of starting a venture with the funds from various sources differ. Larger risk is linked
with the funds which are borrowed, than the equity funds. This risk assessment is one of the main
aspects of financing decisions.
Cash flow position: Cash flow is the regular day-to-day earnings of the company. Good or bad cash flow
position gives confidence or discourages the investors to invest funds in the company.

Control: In the situation where existing investors need to hold control of the business then finance can
be raised through borrowing money, however, when they are prepared for diluting control of the
business, equity can be utilized for raising funds. How much control to give up is one of the main
financing decisions.

Condition of the market: The condition of the market matter a lot for the financing decisions. During
boom period issue of equity is in majority but during a depression, a firm will have to use debt. These
decisions are an important part of financing decisions.

Dividend Decision

Dividends decisions relate to the distribution of profits earned by the organization. The major
alternatives are whether to retain the earnings profit or to distribute to the shareholders.

Factors Affecting Dividend Decisions

Earnings: Returns to investors are paid out of the present and past income. Consequently, earning is a
noteworthy determinant of the dividend.

Dependability in Earnings: An organization having higher and stable earnings can announce higher
dividend than an organization with lower income.

Balancing Dividends: For the most part, organizations attempt to balance out dividends per share. A
consistent dividend is given every year. A change is made, if the organization’s income potential has
gone up and not only the income of the present year.

Development Opportunity: Organizations having great development openings if they hold more cash out
of their income to fund their required investment. The dividend announced in growing organizations is
smaller than that in the non-development companies.

Other Factors

Cash flow: Dividends are an outflow of funds. To give the dividends, the organization must have enough
to provide them, which comes from regular cash flow.

Shareholders’ Choices: While announcing dividends, the administration must remember the choices of
the investors. Some shareholders want at least a specific sum to be paid as dividends. The organizations
ought to consider the preferences of such investors.

Taxes: Compare tax rate on dividend with the capital gain tax rate that is applicable to increase in
market price of shares. If the tax rate on dividends is lower, shareholders will prefer more dividends and
vice versa.
Stock market: For the most part, an expansion in dividends positively affects the stock market, though, a
lessening or no increment may negatively affect the stock market. Consequently, while deciding
dividends, this ought to be remembered.

Access to Capital Market: Huge and organizations with a good reputation, for the most part, have simple
access to the capital market and, consequently, may depend less on retained earnings to finance their
development. These organizations tend to pay higher dividends than the smaller organizations.

Contractual and Legal Constraints: While giving credits to an organization, once in a while, the lending
party may force certain terms and conditions on the payback of dividends in future. The organizations
are required to guarantee that the profit payout does not abuse the terms of the loan understanding in
any manner.

Certain arrangements of the Companies Act put confinements on payouts as profit. Such arrangements
must be followed while announcing the dividends.

IMPORTANCE OF FINANCIAL MANAGEMENT CYCLE:

Finance is the lifeblood of business organization. It needs to meet the requirement of the business
concern. Each and every business concern must maintain adequate amount of finance for their smooth
running of the business concern and also maintain the business carefully to achieve the goal of the
business concern. The business goal can be achieved only with the help of effective management of
finance. We can’t neglect the importance of finance at any time at and at any situation. Some of the
importance of the financial management is as follows:

Financial Planning.

Financial management helps to determine the financial requirement of the business concern and leads
to take financial planning of the concern. Financial planning is an important part of the business
concern, which helps to promotion of an enterprise

Acquisition of Funds.
Financial management involves the acquisition of required finance to the business concern. Acquiring
needed funds play a major part of the financial management, which involve possible source of finance at
minimum cost.

Proper Use of Funds.

Proper use and allocation of funds leads to improve the operational efficiency of the business concern.
When the finance manager uses the funds properly, they can reduce the cost of capital and increase the
value of the firm.

Financial Decision.

Financial management helps to take sound financial decision in the business concern. Financial decision
will affect the entire business operation of the concern. Because there is a direct relationship with
various department functions such as marketing, production personnel, etc.

Improve Profitability.

Profitability of the concern purely depends on the effectiveness and proper utilization of funds by the
business concern. Financial management helps to improve the profitability position of the concern with
the help of strong financial control devices such as budgetary control, ratio analysis and cost volume
profit analysis.

Increase the Value of the Firm.

Financial management is very important in the field of increasing the wealth of the investors and the
business concern. Ultimate aim of any business concern will achieve the maximum profit and higher
profitability leads to maximize the wealth of the investors as well as the nation.

Promoting Savings.
Savings are possible only when the business concern earns higher profitability and maximizing wealth.
Effective financial management helps to promoting and mobilizing individual and corporate savings.,

Accounting vs Financial management play a crucial role in any organization. Accounting is a necessary
input for the financial management function of any businesses. Good financial management is important
for the effective utilization of economic resources of the organization. Accounting restricts up to
reporting and summarizing of financial transactions for the external and internal users whereas financial
management is about planning, directing, monitoring, organizing and controlling of the monetary
resources of an organization to achieve the objective. Every person or business gets involved in some
kind of economic activity. All business carries some kind of economic/financial activities. Accounting and
Financial management are related to the extent that accounting is an important input in financial
decision making. Still, they differ in the treatment of funds and with regards to decision making.
Accounting involves preparing and examining past financial records whereas, financial management
involves planning to achieve its various financial objectives.

ECONOMICS MACROECONOMICS

Finance vs. Economics: What's the Difference?

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By STEPHEN D. SIMPSON

Updated Apr 21, 2019

TABLE OF CONTENTS

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Finance vs. Economics: An Overview

Finance

Special Considerations

Economics

Special Considerations
Finance vs. Economics: An Overview

Although they are often taught and presented as separate disciplines, economics and finance are
interrelated and inform and influence each other. Investors care about these studies because they also
influence the markets to a great degree. It's important for investors to avoid "either/or" arguments
regarding economics and finance; both are important and have valid applications.

In general, the focus of economics is more a focus on the big picture, such as how a country, region, or
market is performing. Economics also focuses on public policy, while the focus of finance is more
company- or industry-specific. Finance also focuses on how companies and investors evaluate risk and
return. Historically, economics has been more theoretical and finance more practical, but in the last 20
years, the distinction has become much less pronounced.

In fact, the two disciplines seem to be converging in some respects. Both economists and finance
professionals are being employed in governments, corporations, and financial markets. At some
fundamental level, there will always be a separation, but both are likely to remain very important to the
economy, investors, and the markets for years to come.

KEY TAKEAWAYS

Economics and finance are interrelated disciplines that inform each other, even if the specifics are
distinct.

Finance, as a discipline, is derived from economics; it involves assessing money, banking, credit,
investments, and other aspects of the financial systems.

Finance can be further broken down into three related but separate categories—public finance,
corporate finance, and personal finance.

Economics looks at how goods and services are made, distributed, and used, as well as how the
economy overall functions, along with the people who drive economic activity.

The two main branches of economics are macroeconomics, which looks at the overall economy, and
microeconomics, which looks at specific factors within the economy.