What is meant by Financial Management ? Explain the factors affecting Investment decision.

Answer – Financial management plans, obtains and uses funds to support the enterprise's objectives. It aims to procure funds at suitable cost and risk and to deploy them effectively.

Investment decisions determine how funds are allocated to assets. Long-term investment decisions, or capital budgeting, concern fixed assets and projects; short-term investment decisions concern working capital.

Why capital budgeting matters: it influences long-term earning capacity; involves large funds; commits resources for a long period; and is often difficult or costly to reverse. A poor plant investment can affect competitiveness for years.

Main factors:

• Cash flows: estimate the amount and timing of cash outflows and inflows over the project's life.
• Expected rate of return: compare the project's expected benefit with the required return and alternatives.
• Investment criteria: apply suitable evaluation methods consistently, considering cash flow, risk, funding cost and decision objectives.

Risk and availability of funds are important considerations within the evaluation. The core prescribed classification contains three factors; a request for four can be answered by explaining risk separately without claiming a different official list.

Example: compare two machines on purchase cost, operating savings, useful life and expected cash receipts before selecting one.