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The Financing decisions and Investment decisions are the integral functions of financial management which include the procurement of funds and their utilization.
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Meaning of Financing Decisions:
When a manager decides about the source from where he can raise the capital is called financing decisions. Secondly, it is concerned with borrowing and allocating the funds for the investment. Finance can be raised from the Owner’s fund and borrowed funds. If the companies are having a smooth cash flow then borrowed funds preferable.
Owner’s Funds include Share capital, Retained earnings. Whereas debentures, loans, bonds are included in borrowed funds. Under this, the finance manager has to focus on the advantages and disadvantages of both sources.
Meaning of Investment Decisions:
When a financial manager takes the decisions regarding the investment of funds for getting maximum benefits for the firm. It is also known as capital budgeting decisions because, in this, some decisions are related to fixed assets as well as current assets. It is concerned with a large number of funds and also long-term on a permanent basis.
For an example of a long-term capital decision: related to buying Machinery for Production, Purchase Land, and building for expansion. Secondly, Short term capital decisions: related to buying the inventory (Stock), expenses for day-to-day activities.
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The Chart of difference between Financing Decisions and Investment Decisions
Points of differences | Financing Decisions | Investment Decisions |
| Meaning | It tells about the source from where the capital can be raised. | The decisions regarding the investment of funds for getting maximum benefits for the firm. |
| Sources | Owner’s Funds include Share capital, Retained earnings. Whereas debentures, loans, bonds are included in borrowed funds. | Long-term capital decision: related to buying Machinery for Production, Purchase Land, and building for expansion. Secondly, Short term capital decisions: related to buying the inventory (Stock), expenses for day-to-day activities. |
| Funds & Assets | Finance can be raised from the Owner’s fund and borrowed funds. | Decisions were taken: related to fixed assets as well as current assets. |
| Functions | Financing Decisions includes an Inflow of cash. | Investment Decisions include outflow of cash. |
| Decisions | In financing decisions, How much debt and equity sell, When to pay a dividend. | capital decisions: related to buying the inventory (Stock), expenses for day-to-day activities. |
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Conclusion:
Thus, financing decisions concerned with borrowing and allocating the funds for the investment. Finance can be raised from the Owner’s fund and borrowed funds. On the other hand, Investment Decisions concerned with a large number of funds and also long-term on a permanent basis.
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