Financing decisions are very much affected by (i) the firm’s present portfolio of assets and (ii) the firm’s future (expected or planned) portfolio of assets. Portfolio of assets refers to proportions of fixed assets and current assets, in the total value of assets (or total capital employed). The proportion in which fixed assets and current assets are mixed (asset mix) determines the risk complexion of the firm, Costs of various methods of financing decisions and investment decisions are intimately related.
The function of financial manager is to see that funds (short-term as well as long-term) are invested wisely. Then, he is concerned with the function of allocation of funds to different uses. He makes investment decisions. It may be pointed out here that many investment decisions are not made by him exclusively. Executives in the areas of marketing production. Personnel participate also include abandonment decision. Assets held already not justifying investments are abandoned. This means justifying investments are abandoned. This means reallocation of funds.
More specifically, the financial manage performs the following sub functions :
(i) Capital budgeting-investment proposals are evaluated on the basis of their expected return and the additional risk.
(ii) Determination of proper level of liquidity and
(iii) Supervision of collection of accounts receivables and investment in inventory.
Capital budgeting is concerned with investments whose benefits will flow in over a period exceeding one year. These investments are commonly known as fixed assets and deferred revenue expenditure (like large cash drain on advertising). Determination of proper level of liquidity and supervision of collection of accounts receivables and investment in receivables may jointly be called as management of current assets. So, investment decisions cover the entire area of asset management.
Some special investment decisions are also taken by a financial manager. Such decisions relate to non recurring aspects of business. These aspects are mergers acquisitions, failures and recoganisations.