Financial decision making is a very important aspect within the company. Succeeding in these types of decisions is very important to achieve our objectives and minimize the dangers and risks in our investment.
In the business field, there are three types of financial decisions:
- Investment decisions or disinvestment
- Financing decisions
- Remuneration decisions
Investment decisions will be reflected in the assets of the balance sheet of a company, those of financing in liabilities and those of remuneration in the appreciation that investors have for our debt securities or equity securities, that is, the value of our shares in the market.
Investment decisions
Investment decisions affect the type of assets we have and the implicit risks that each of them have. It is not the same to invest in patrimonial elements than in productive elements. They will affect the risk of those elements in the exploration. Obviously, it is not the same to invest renting than to invest buying, therefore, financial investments will be different. These decisions will affect the degree of liquidation that each of these elements has and the expected profitability in the exploration.
Any investment decision must consider the capital cost of the company, the liquidity required to meet the financial needs and the implicit risk of this.
Financing decisions
Investment decisions will influence the type of financing source to be used, the cost of the financing and the enforceability of each of them.
We must ensure that there is always harmony:
- between the cost of financing and the expected return,
- between the enforceability of financing and liquidity in our assets,
- between the volume of funds that we can capture from the market and the investments we have
As is logical, any financing decision must pursue the obtaining of an optimal financial structure (weights of the different sources of financing used) which means to reach a minimum weighted average cost of capital, which will result in the maximization of the Company value.
Decisions of remuneration
It will be very important to find a balance between the profitability we can offer our investors and the expectations they have when they assume the risk by buying shares or debt from our company.
The remuneration decisions are those related to the dividend policies. The manager must always consider that the shareholder invests his money in exchange for a return and the distribution of dividends is one of the ways along with the capital gains on the sale of his shares.