3 major types of financial management decisions that you need to know
It goes without saying that financial management is not an easy job to do, especially if you don’t know the types of financial management decisions that will help you to make the major decisions:
1) Capital Budgeting
2) Capital Structure
3) Working Capital Management
#1: Capital Budgeting – you can’t begin to learn the types of financial management decisions without capital budgeting because this is the first and foremost part of any major business. Capital budgeting is nothing but the valuation of real assets. Capital budgeting is one of the most important types of financial management decisions because budgeting procedure determines the validity of long-term investments as well as the purchase of machinery and other accessories.
Factors such as:
* Payback period
* Net present value
* Accounting rate of return
* Internal rate of return
* Profitability index
Are taken into consideration before reaching on comprehensive conclusions.
#2: Capital Structure
Capital structure is the second most important factor on the list of types of financial management decisions because it helps you to judge a company’s ability to make investments and how its finance works.
* Types of financial management decisions usually include using existing funds, borrowing cash from various sources and issuing bonds.
* Companies can sometimes raise more funds by issuing stocks but this can drop the prices of existing shares.
Since the types of financial management decisions vary from company to company, it is impossible to use a single handed approach towards every company and come to conclusions. This is where you can use the basics of capital structure analysis to understand the types of financial management decisions each company makes.
The combination of debt, cash financing and equity determines a company’s capital structure. Needless to say, these types of financial management decisions are very important in helping an investor to make rational decisions about joining partnership with a company.
#3: working capital management
The simplest definition for working capital management is the relationship between a company’s short term assets and liabilities. The working capital management is one of the most crucial types of financial management decisions because working capital management is one of the types of financial management decisions that will help you to understand whether a company can function effortlessly or not.
These are the 3 major types of financial management decisions that every investor need to know. Even board members of existing companies use these 3 types of financial management decisions to judge how a company can perform in crisis and grow further. Sometimes your business ideologies can conflict with an organizations’ way of managing monetary assets. In such cases the best thing you can do is shift your investment to a company where you are comfortable working with.
You can also reduce or diversify your investments in any of these cases to get the most out of your investment. Even officials of an organization use these 3 types of financial management decisions to make crucial decisions of improving an organization’s performance.
KW: types of financial management decisions