Managerial finance functions are functions that require managerial skills in their planning, execution and control. The managerial finance functions are as follows:
1. Investment Decision
Investing decision is the managerial decision regarding investment in long-term proposals. It includes the decision concerned with acquisition, modification and replacement of long-term assets such as plant, machinery, equipment, land and buildings. Long term assets require huge amount of capital outlay at the beginning but the benefits are derived over several periods in the future. Because the future benefits are not known with certainty, long-term investment proposals involve risks.The financial manager should estimate the expected risk and return of the long-term investment and then should evaluate the investment proposals in terms of both expected returns and risk. The financial manager accepts the proposal only if the investment maximizes the shareholders wealth.
2. Financing Decision
Financing decision which is also known as capital structure decision, is concerned with determining the sources of funds and deciding upon the proportionate mix of funds from different sources. It calls for raising of funds from different sources maintaining appropriate mix of capital. The sources of long-term funds include equity capital and debt capital. A particular combination of debt and equity may be more beneficial to the firm than any others. The financial manager should decide an optimal structure of debt and equity capital.
3. Dividend Decision
Dividend decision is the decision about the allocation of earnings to common shareholders. It is concerned with deciding the portion of earnings to be allocated to common shareholders. The net income after paying preference dividends belongs to common shareholders. The financial manager has three alternatives regarding dividend decision:
* Pay all earnings as dividend
* Retain all earnings for reinvestment
* Pay certain percentage of earning and retain the rest for reinvestment.
The financial manager must choose among the above alternatives. The choice should be optimum in the sense that it should maximize the shareholders wealth. While taking dividend decisions, the financial manager should consider the preferance of shareholders as well as the investment opportunities available to the firm.
4. Working Capital Decision
Working capital decisions refers to the commitment of funds to current assets and deciding on their financing pattern. It refers to the current assets investment and financing decision. Investment in current assets affects firm's profitability and liquidity. More investment in current assets enhances liquidity. Liquidity refers to the capacity to meet short-term obligation of the firm. At the same time more investment in current assets negatively affects the profitability because current assets earn nothing or they earn much less than their cost of capital. Similarly, less investment in current assets negatively affects the firm's liquidity and the firm may lose its profitable opportunities. So, a financial manager should achieve a proper trade-off between liquidity and profitability which requires maintaining optimal investment in current assets.