What is Financing Decision?

The financing decision is about the amount of finance to be raised from various long-term sources, this determines the various sources of finance, as well as it also provides the cost of each source of finance. The main sources of finance are:

• Shareholders’ Funds 
• Borrowed Funds 

The shareholders’ funds or owners’ funds consist of equity capital and retained earnings, whereas borrowed funds refer to finance raised as debentures or other forms of debt. The borrowed funds contain risk because they involve a commitment of fixed interest payment, although there will be loss in the organisation. On the other hand, owners’ funds have less risk because there is no such commitment regarding payment of dividends and replacement of the capital amount. Financing decisions involve analysing the risk and cost associated with each source of finance. Both sources have their own merits and demerits.

Burrowed funds are considered to be the cheapest source of finance because interest paid is a deductible expense for the calculation of tax liability. The cost of raising finance is known as floatation cost, and it is also considered while taking financing decisions. In this way, the financing decision is related to deciding how much amount is to be raised from each source. This decision determines the overall cost of capital and the financial risk of the enterprise.

Financial Management is concerned with the management of the flow of funds and involves decisions related to the acquisition and application of funds in long-term and short-term assets. It is concerned with two aspects, they are procurement of funds as well as usage of finance.

Financial decision refers to the decision related to financial matters of a business firm. There are various financial decisions that a firm makes to maximize shareholders’ wealth. There are three major decisions that every financial management takes investment decision, financing decision, and dividend decision.