a firm in an economy with a goal- to create value to its owners. to pursue its goal the firm preforms various activities such as supplying goods and services in the economy . the establishment and operation of a firm requires resources of various types. For example , if you decide to run it, first, you will have to acquire fixed asstes such as building, land , and machinaries, etc. deciding the procurement of these assetes, in the language of finanae, is an investment decision.
the firm must pay to the investors on debt securities periodically whether it earns profit or not. but there is no legal compulsiona to pay to the equity shareholders. it means the firm has a choice as regards to the distrubution of its earning - it may choose to distribute or retain all earning or to distribute a portion of it and retain the balance. this decision related to the distribution of earning is known as dividend decision. further, you need to decide the sources and amount of capital needed to purchsae the raw materials , and for paying the wages and salaries . you want to maintain sufficient cash and inverntories to run the day to day business smoothly. this form of capital is known as working capital and decision it is known as working capital management.
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