Give the meaning of ‘Investment’ and ‘Dividend’ decisions of financial management.
1) Investment decisions: A firm must decide where to invest the funds such that it can earn maximum returns. Such decisions are known as investment decisions. These decisions are taken for both long term and short term. (a) Long-term investment decisions affect a firm’s long-term earning capacity and profitability. They are also known as capital budgeting decisions. For example, the decision to purchase a new machine or land. (b) Short-term investment decisions, also known as working capital decisions, affect the day-to-day business operations. For example, decisions related to cash or bill receivables.
2) Dividend decisions: Dividend decisions involve decisions regarding how the company would distribute its profit or surplus. It can either distribute it to equity shareholders in the form of dividends or keep it in the form of retained earnings. Dividend decisions aim at maximising the wealth of shareholders while at the same time considering the requirements of retained earnings for the company.