# Finance Functions (Financial Decisions)

Financial management is exercised through a set of inter-related decisions. Alongside the investment decision, the other long-term decisions are the financing decision and the dividend decision, while the principal short-term decision is working capital management.

## 1. Financing Decision (F)

Concerned with acquiring the optimum finance to meet financial objectives by balancing equity and debt.

The manager must distinguish cash flow vs. profit — financing is serviced out of cash, not accounting profit.
Must assess and manage risk (e.g., currency fluctuations, default/debt risk). Hedging is used to minimise such risks.
Key areas: Capital Structure, Risk Management, Cash Flow.

## 2. Dividend Decision (D)

Determines how much profit is paid out as dividend to owners/shareholders and how much is retained for growth.

Dividends affect the company's market value and share price.
The decision has both financial and growth implications (payout vs. reinvestment trade-off).
Key areas: Dividends, Profit Retention, Market Value.

## 3. Short-term Finance Decision — Working Capital Management (WCM)

Most short-term decisions reduce to the management of current assets and current liabilities, i.e. Working Capital Management.

## Putting it together

The three long-term functions (Investment, Financing, Dividend) plus WCM together drive the firm's market value and the risk–return trade-off. The finance manager's job is to take these decisions so that shareholders' wealth is maximised while risk is kept in balance.

Worked example

### Example 1

Identify the decision type: A company decides to fund a new plant with 60% equity and 40% long-term debt → this is a Financing Decision (capital structure / debt–equity mix).

### Example 2

Identify the decision type: The board decides to pay out 30% of profits as dividend and retain 70% for expansion → this is a Dividend Decision (payout vs. retention).

### Example 3

Identify the decision type: The firm sets policies on inventory levels, debtor collection periods and creditor payment terms → this is Working Capital Management (short-term/current asset–liability decision).

⚠️ Common exam mistakes

Confusing the financing decision (how to raise funds / debt–equity mix) with the investment decision (where to deploy funds).
Forgetting that financing decisions must focus on cash flow, not accounting profit, because debt and dividends are serviced in cash.
Treating dividend decisions as purely a distribution matter and ignoring their impact on retained earnings, growth and share price.
Assuming working capital management is a 'minor' topic — it is the core of all short-term financial decisions.

Reference:

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Finance Functions: Financing, Dividend and Working Capital Decisions

Worked example

⚠️ Common exam mistakes