Financial Management has four major scopes that it revolves around. The four scopes of financial management are investment decisions, financing decisions, dividend decisions, and working capital decisions.
Investment decision
There are two components of investment decisions which are capital budgeting and liquidity. While capital budgeting talks about the proper and accurate allocation and placement of funds in assets which would prove to be beneficial to the company in the future and help them earn heavy amounts of profits, the desired liquidity is obtained when an appropriate balance is maintained between the two.
Investment decision also talks about the various aspects of a project which include the analysis of the risk factor, the amount of money that would be initially spent, and the estimated amount of money that would be earned from it eventually, deciding if it would be fruitful to take part in a project.
Financing decision
Financing decisions concerns itself more towards the firm’s financial structure and its financing mix. At times the firm is required to raise funds to make sure that the company has enough to invest. For this, the company then sits to decide the various methods that it would use to raise the required funds, which options would be better, and the time that would be required for it.
It is the job of the finance manager to create such an optimum mix that the company can earn a long time. Even the time of raising those funds is also decided by the finance manager.
Dividend decision
As the name very clearly states that the third scope of financial management deals with the decisions related to dividends. A dividend policy is an important requirement of a company in which it decides whether to distribute its profits as dividends or only distribute a part of it and deciding upon the best dividend ration. The decision is made for both; cash and stock dividends.
Working capital decision
The name of the fourth scope gives away an idea of the kinds of decisions that are made by the finance manager in this regard. Decisions focused in this area are majorly related to current assets and the current liabilities present within a company. While current assets include cash, short term securities, and inventory, current liabilities consist of outstanding expenses, payable bills, and bank overdraft and they can be converted into cash within a year as well.
