Major decisions made by financial manager
Development Opportunity: Organizations having great development openings if they hold more cash out of their income to fund their required investment. Managers use this information to ensure that goods or services that the company produces are receiving an accurate amount of costs and the price charged to consumers ensures the company recoups production costs, along with a specific level of profit.
If capital market can easily be accessed or approached and there is enough demand for securities of the company then company can give more dividend and raise capital by approaching capital market, but if it is difficult for company to approach and access capital market then companies declare low rate of dividend and use reserves or retained earnings for reinvestment.
Role of finance manager
It is also possible to choose a mixed policy in this regard, distributing a part among shareholders and investing the rest in the company. Various important decisions which the financial manager has to take are; 1. Factors Affecting Dividend Decision: The finance manager analyses following factors before dividing the net earnings between dividend and retained earnings: 1. In view of this, finance manager is expected to call upon the expertise of other functional managers of the firm particularly in regard to investment of funds. In other words, the Financial Manager must stipulate and assure that the existing assets are managed in the most efficient way possible. A finance manager has a final say in decisions on dividends than in asset management decisions. The financial manager must strive to obtain the best financing mix or the optimum capital structure for his or her firm. Share with friends. Shares specifically equity shares are considered to be the least safe ones and even at the time of balance sheet, equity share holders are given the last preference. Financing decision The second important decision which finance manager has to take is deciding source of finance. Larger risk is linked with the funds which are borrowed, than the equity funds. Management accountants may prepare budgets for individual departments that eventually roll into the master budget. Generally mature companies declare more dividends whereas growing companies keep aside more retained earnings. Finance manager compares the risk with the cost involved and prefers securities with moderate risk factor. Deciding how much to raise from which source is concern of financing decision.
The payout ratio is equal to the percentage of dividends to earnings available to shareholders. Let us learn a bit more about the types of financing decisions. Dependability in Earnings: An organization having higher and stable earnings can announce higher dividend than an organization with lower income.
Firm prefers securities which involve least floatation cost. Solved Question for You Question: Why do organization retain the earnings rather than distributing them? For each type of decision, give an example of a business transaction that would be relevant.
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