Any company will invest finance for the sake of deriving a return which is useful for four main reasons:
1. To reward the shareholders or owners of the business for staking their money and by foregoing their current purchasing power for the sake of current and future return.
2. To reward creditors by paying them regular return in form of interest and repayment of their principal as and when it falls due.
3. To be able to retain part of their earnings for plough back purposes which facilitates not only the company’s growth present and the future but also has the implication of increasing the size of the company in sales and in assets.
4. For the increase in share prices and thus the credibility of the company and its ability to raise further finance.
Such a return is necessary to keep the company’s operations moving smoothly and thus allow the above objective to be achieved.
A financial manager with present investment policies will be concerned with how efficiently the company’s funds are invested because it is from such investment that the company will survive.
Investments are important because:
- They influence company’s size
- Influence growth
- Influence company’s risks
In addition, this investment decision making process also known as capital budgeting, involves the decision to invest the company’s current funds in viable ventures whose returns will be realised forlong term periods in future. Capital budgeting as financial planning is characterised by the following:
1. Decisions of this nature are long term i.e. extending beyond one year in which case they are also expected to generate returns of long term in nature.
2. Investment is usually heavy (heavy capital injection) and as such has to be properly planned.
3. These decisions are irreversible and any mistake may cause the company heavy losses.