Financing Decision

In this unit you will be more focusing on the financing decisions. This is because you as finance a manger should be involved in all financial matters of the organization, since all most all the activities in the organization have financial implications.

As a financial manager you have to plan for and mobilize the required funds from various sources when they are required and at an acceptable cost. This decision is called financing decision.

For this purpose, you have to keep liaison with the banks and financial institutions. You also deal with merchant banking agencies for procuring funds from the public thorough issue of shares, debentures and inviting public to subscribe to its fixed deposits. In deciding, how much to procure from various sources, you will weigh many considerations like cost of funds in the form of interest / dividend and cost of public issue in case of shares and debentures and the length of time for which funds will be available. Banks and other financial institutions, which give short-term and long-term loans generally, lay down their conditions. These conditions are aimed at ensuring the safety of the loans given by them and contain provisions restricting the freedom of the borrower to raise loans from other sources. Therefore, you as financial manager will try to balance the advantage of having funds available with the costs and loss of flexibility arising from the restrictive provisions of the loan contract.

A company can raise finance from various sources such as by issue of shares, debentures or by taking loan and advances. Deciding how much to raise from which source is concern of financing decision. Mainly sources of finance can be divided into two categories:

• Owners fund.
• Borrowed fund.

Share capital and retained earnings constitute owners’ fund and debentures, loans, bonds, etc. constitute borrowed fund. The main concern of finance manager is to decide how much to raise from owners’ fund and how much to raise from borrowed fund. The borrowed funds have to be paid back and involve some degree of risk whereas in owners’ fund there is no fix commitment of repayment and there is no risk involved.