Investment decisions and financing decisions:
Investment decisions : A long-term investment decision is called capital budgeting decision. It involves committing the finance on a long-term basis. For example, making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch. Capital budgeting decisions are very crucial, as they affect the earning capacity of the business in the long-run. Since, these decisions involve huge amount of investment and are irreversible, they need to be taken with utmost care.
Financing decisions: This decision relates to the relative proportion of various sources of finance. It involves identification of various available sources. The main sources of funds for a business are shareholders’ funds and borrowed funds.
A business has to decide the proportion of funds to be raised from sources, which serves the purpose most effectively. Thus, we can say that financing decision is concerned with how much finance is to be raised from which source.
This decision determines the overall cost of capital and the financial risk of the enterprise, which depends upon the proportion of debt in the total capital.