BISHOP STUART UNIVERSITY

NAMES REG NO

TUHIMBISE DEUSDEADIT 22/BSU/PGPAM /1326

OWOMUGISHA CHARLOTTE 22/BSU/PGPAM/1591

NUWAGIRA DEUS 22/BSU/PGPAM/1838

COURSE NAME: FINANCIAL MANAGEMENT ADMINISTRATORS

COURSE LEVEL: YEAR 1, SEM 2

LECTURER: DR. KARISI ELIAS

QUESTION:

Finance decisions are summed up as investment ,financing, working capital and dividend
decision .examine the impact of the above decisions if the correct decision was taken in each .
Financial Management pertains to organizational practices which includes planning, controlling ,
administering, and organizing the financial activities of a firm. It requires a thorough application
of the essential management principles towards the organization's financial capital (Noori, 2020).
An effective financial management is one of the most crucial aspects to be properly executed in
order for the companies to achieve its organizational goals.

Financial management refers to applying management concepts to budgeting, forecasting,

managing, and controlling a company’s financial resources to achieve its objective. It aims to
maximize investors profit by optimizing the firm’s money usage. It deals with all the areas
connected to profitability, expenses, cash, and credit

The following are the types of financial management

Capital Budgeting:

It relates to determining what needs to happen financially for the company to reach its short- and
long-term objectives. Where should capital funds be spent to support growth?

These management teams are likewise answerable for raising funds and investing funds. If an
organization merges with another organization or expands, the team will aid the financial needs
for merger or expansion.

Capital Structure:

Figuring out how to pay for operations and growth. If interest rates are reasonable, taking on debt
might be the best response. A company might also seek funding from a private investment
company, consider selling assets like real estate, or, where applicable, selling capital.

At the point when the team refers to capital structure, they are apparently dealing with a
company’s debt-to-equity ratio, which gives an understanding of how strong an organization is
financially or how risky the organization is financially.
Working Capital

Working capital management of an organization deals with managing bookkeeping methods and
accounting policies intended to keep track of current assets, current debts, cash
flow, inventory turnover ratio, working capital ratio, and much more.

The basic task of working capital management is to assure the organization dependably keeps up
adequate liquid cash to meet its short-term debts and operational cost. This is one type of
financial management where the team needs to maintain working capital management to
smoother the company’s operational cycle, and also to increase the company’s earnings

The following are the financial decisions;

Investment decision refers to financial resource allocation. Investors opt for the most suitable
assets or investment opportunities based on risk profiles, investment objectives, and return
expectations.

Firms have limited financial resources; therefore, the top-level management undertakes capital
budgeting and fund allocation into long-term assets. Managers overseeing business operations
opt for short-term investments to ensure liquidity and working capital. Investment decisions are
also influenced by the frequency of returns, associated risks, maturity periods, tax benefits,
volatility, and inflation rates.

Investment decisions are made to reap maximum returns by allocating the right financial
resource to the right opportunity. These decisions are taken considering two important financial
management parameters ,risks and returns.

Short-term investments, also known as marketable securities or temporary investments , are

financial investments that can easily be converted to cash, typically within five years. Many
short-term investments are sold or converted to cash after a period of only three-12 months.
Some common examples of short-term investments include CDs, money market accounts, high-
yield savings accounts, government bonds, and Treasury bills. Usually, these investments are
high-quality and highly liquid assets or investment vehicles.
Long-term investments are assets that an individual or company intends to hold for a period of
more than three years. Instruments facilitating long-term investments include stocks, real estate,
cash, etc. Long-term investors take on a substantial degree of risk in pursuit of higher returns.

The following are the Postive impact of the investment decision if correctly taken;

Investment decision if correctly taken allows high profit returns especially the short term
investments which allows maximization of profits in a short period of time. The short term
investments include the stock in the stories for those who are owning hard wares, where by the
owner of the business can sell the stock and convert to liquid cash. This helps the business owner
to have much returns with the limited risks .

The long term investment decision if correctly taken the owner of the business will enjoy much
profits and higher returns for the business because of taking higher level risks in pursuit of higher
returns. The examples are real estate businesses, purchase of latest technology machinery,
planting of trees, building commercial or rental buildings. These long term investments involve
higher risks for example the planted trees can be burnt by wild fires and more others but they
give out higher returns to the business owner if they reach to their maximum saturation points.

The following they are negative impacts of the investment decision if wrongly taken;

Wrong investment decisions to invest in business which can can not suit with the geographical,
history and the beliefs of the customers in the area especiary the short term business. Short term
business need to be well positioned in the are where they can yield much returns to the
employees for example the business of kikomando works better with in urban centers more than
in the local areas where by when you invest in kikomando business in villages it will be a poor
investment decision thus causing heavy losses to the business owner.

Long term investments have heavy risks which can hamper the business and the business owner.
In long term investment is where the business owner needs a lot of capital to finance the
investment and many investors try to use the owners capital and others use the equity. The long
term investment business include the purchase of the machinery, land, putting up buildings ,and
tree planting. These involve a lot of risks and require more time to get returns . if the business
does not have working capital a side so that they can be giving him money then the business
owner will eventually collapse financially.

The working capital

Working capital management is a business process that helps companies make effective use of
their current assets and optimize cash flow. It’s oriented around ensuring short-term financial
obligations and expenses can be met, while also contributing towards longer-term business
objectives. The goal of working capital management is to maximize operational efficiency. The
working capital financing decision looks on two questions does the firm keep a side its wealth in
short term resources . if the firm cannot refrain from financing the short term resources and
how much investment should be made in these short term resource or ventures. the working
capital enables the enterprise or business to continue operating the long term assets regularly to
allow the long term assets to achieve their maximum saturation point . Short term ventures like
cash balances, prepayments, short term business like the daily earning ventures.

The following are positive impacts of working capital if correctly taken;

the working capital is best financial decision since maintain a certain amount of money on a
daily basis to cover day-to-day expenses, bills, and other regular expenditures. This helps the
business owner to clear to zero all the daily operations for example the paying of the employees
who work on wages, clearing electricity bills, water bills which gives a way for the long term
investment to reach their time of pay back and the business owner will get the large a mounts of
profits.

Efficient working capital management helps maintain smooth operations and can also help to
improve the company's earnings and profitability. Management of working capital includes
inventory management and management of accounts receivables and accounts payables. The
main objectives of working capital management include maintaining the working capital
operating cycle and ensuring its ordered operation, minimizing the cost of capital spent on the
working capital, and maximizing the return on current asset investments.  
Working capital is a daily necessity for businesses, as they require a regular amount of cash to
make routine payments, cover unexpected costs, and purchase basic materials used in the
production of goods.

The following are the positive impacts when the working capital is decision is properly used

Working capital if properly used provides a foundation for the long term investment ventures to
produce high profits in their right time . The working capital comes from the set aside businesses
where the business owner can get cash in order to perform the daily operations of the business.
when correctly applied in the highly earning profit business which creates a large financing
capacity to the long term business such that i can yield good results.

Working capital is a daily necessity for businesses, as they require a regular amount of cash to
make routine payments, cover unexpected costs, and purchase basic materials used in the
production of goods. This helps the business to regain stable such that the long term ventures can
reach their maximum saturation point and give a lot of the profits to the business owner.

Working capital management is essentially an accounting strategy with a focus on the

maintenance of a sufficient balance between a company’s current assets and liabilities. An
effective working capital management system helps businesses not only cover their financial
obligations but also boost their earnings.

The following are negative impacts of working capital if used wrongly

It can lead to poor accountability because of the mixing of the profits and diverting the capital
from the daily earning venture to pay off workers and perform the daily operations of the long
term business.T his can cause poor accountability because of not knowing how much you have
spent on the operations of the long term investment ventures

It can also lead to limited funds of the short term investment ventures since re investing the
dividends is not done because the profits are used to perform the daily operations of long term
investment ventures. the profits should be re invested in the business for the quick growth of the
business so as to yield so much profits but when they are diverted to finance the daily operations
of the long term investment ventures it can lead to the collapse of the business.
FINANCING DECISION

Financing decisions are decisions that are made to ensure the financing of the company. They
relate to the raising of equity as well as debt for the company to fund its investment decisions. It
is a continuous and ongoing process, as each company regularly needs funding.

financing Decision: A financial decision which is concerned with the amount of finance to be

raised from various long term sources of funds like, equity shares, preference shares, debentures,
bank loans etc. Is called financing decision. In other words, it is a decision on the ‘capital
structure’ of the company.

 out a perfect balance between the two so as to maximize shareholders’ value and the
profitability of the firm. Going for higher equity capital reduces the tension of repayment as they
become part of the firm’s own capital. But then shareholders must receive higher returns in the
form of dividends, which will lead to dilution of ownership and voting rights.

On the other hand, debt includes loans from banks and financial institutions, debentures . Higher
debt increases the interest burden and makes the capital structure riskier. Furthermore, the
company cannot rely on this source of finance permanently, as lenders can reclaim their money
at any time. Any weak period of performance can play spoilsport with the company and put on it
under multifold pressure.

Financial managers have to chalk out an optimal mix of debt and equity. In doing so, they have
to take care of various factors such as the cost of financing, the risk involved, the floating cost in
case of issuing equity, the company’s cash-flow position in the immediate future, the state of the
economy, debt, and equity markets, 

The following are the positive impacts of the financing decision.

One positive impact is that it allows a business to leverage a small amount of money into a much
larger sum, enabling more rapid growth than might otherwise be possible for example the debt
financing allows the business to be boosted by allowing to expand and have long term
investments such as when the business owner get a debt of favorable terms of interests the
business can invest in purchasing latest machinery thus making huge profits.
The payments on the debt are generally tax-deductible. Additionally, the company does not have
to give up any ownership control, as is the case with equity financing. Because equity financing
is a greater risk to the investor than debt financing is to the lender, debt financing is often less
costly than equity financing for example after financing the debt the owner of the business can
remain with the gained profits and the whole business structures such as the stock and the
buildings which allows the expansion of the business.

Negative impacts of financing decision if wrongly taken,

The use of debt financing can cause the collapse of the investment venture since the interest
must be paid to lenders, which means that the amount paid will exceed the amount borrowed the
profits which are made from the financed debt business will be paid as interests which will
eventually cause the total collapse of the business because the owner of the business will fail to
re invest the profits which will be used to finance the acquired debt for example if the business
man start up a business using the acquired debt to finance the business there will be a large
chance for the business to collapse because of the pay back times

Use of debt financing can cause stress ,havoc ,fear and eventually death due to Payments on debt
must be made regardless of business revenue, and this can be particularly risky for smaller or
newer businesses that have yet to establish a secure cash flow to service the debt. There are high
interest debt for example the kafuna which is on rated on 100% percent interest and when the
business does not give a lot of returns the owner of the business can commit suicide because of
much pressure to service the acquired debt

Debt financing can be risky for businesses with inconsistent cash flow and considering the pay
back period .This can cause the financial shutdown because the business owner will be forced to
sell the stock in order to service the debt and eventually there will be no re investing of the
profits and thus the business will be its evenings of closing down .

Dividend financial decision

Under dividend decisions, whenever a company makes a profit, it decides to reward its

shareholders in return for their investment, trust, and confidence in the company. This reward is
called a dividend. At the same time, managers must decide to retain part of the profit for the
future needs of the company. This is known as retained earnings.

Managers have to make the important decision of how many portions of the profit the company
should pay out in dividends and what part they should keep with them. Giving away higher
dividends makes the stock attractive and increases the market price and the overall market value
of the company. But they also have to take into account earnings and their stability, the growth
prospects of the company, its cash flow status, dividend taxes, and above all, its own funding
requirements,

The following are positive impacts of dividends,

Paying dividends is that they can help provide shareholder loyalty. Companies with a history of
dividend payments are expected to maintain those payouts if possible because the share holders
will be motivated and they will remain committed to the investment. This can help the
investment to get adequate funding because the share holders will be assured of the profits after
the end of the financial year

Dividends can also help the company or business to grow fast if the share holders choose to re
invest in the business which will yield for more returns in the future. re investing the dividends
increase on the expansion of the business and opening up other branches in different areas or
countries eventually

The dividends acts as public relations edge to the company . the company that make much profits
at the end of every financial year and reward its share holders acts as advertising mechanism
when the they to advertise the purchase of shares from non share holders. The potential share
holders will welcome the opportunity because the people would like to invest their capital in a
successful business.

The following are negative impacts of sharing the impacts

A company that pays too high a portion of profits as dividends has little money to fund growth
and the share value will not increase the business will not grow as its expected because most of
the profits have been shared to the shareholders. this will not permit the increase of the stock and
the purchase of the long term investments such as land and advanced technological machinery to
be used in the business.

Sharing of the large proportion of the dividends can create the total collapse of the business
venture because the business will lack inadequate funding and the resources to be used as the
building structures and the cash to perform the daily operations of the business. In the sense of
making the shareholders happy so as not to withdraw their support can hamper the development
of the business thus ending up the business to collapse.

In conclusion the above are the financial decisions which a business owner has to take them
important because investment decision informs the business owner the type of the investment
decision has to take, the financincing decision informs the business owner that he or can use
equity or debt capital, and more others. above also there impacts when the above decisions if
they are wrongly taken up by the business owner where by the can cause the business to flourish
or eventual collapse.
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W. F. Sharpe (1970). Portfolio Theory and Capital Markets. New York: McGraw-Hill.
W. F. Sharpe (1972). Risk, market sensitivity and diversification. Financial Analysts Journal 28,
1 (January/ February): 74–79.
W. F. Sharpe (1974). Imputing expected returns from portfolio composition. Journal of Financial
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