How Does Finance Influence Your Business Decisions?
Today, corporate enterprises need to have an effective cost-control mechanism in place to manage their expenses if they are to survive in the marketplace especially in times of a recession in the economy. During this period, such establishments usually experience little growth and a decrease in their operating activities in such an environment because there is a decline in demand. In such a situation, it is necessary for top managerial personnel of such companies to ensure that there is no wasteful expenditure as far as possible. They can achieve this objective only when individuals responsible for carrying out the finance function are diligent and keep a sharp eye out on the type of costs various other departments are incurring. In addition to this, such an organization should take the initiative to introduce new techniques that go a long way in making the existing production processes more efficient and cost-effective.
These business organizations need to strive to ensure greater synergy between their numerous processes and this is where the finance function plays a vital role. All companies operate in the marketplace to earn profits and for the people managing such organizations money is critical lifeblood. This is the reason why finance and cost-control assume such significance to all corporate enterprises. Generally, in any company, it is possible to divide the finance function into four distinct categories, which are as follows:
Investment decision
One of the important responsibilities of managers in charge of carrying out the finance function of a corporate enterprise is taking prudent investment decisions. It includes judiciously allocating a part of the monetary resources of such an organization into long-term assets to generating revenue in the future. Experts who specialize in the field of business and finance refer to this essential activity as capital budgeting. It involves the following critical activities:
- Evaluating every new investment proposal regarding its feasibility and profitability; and
- Comparing the cut-off rate between new investment proposals and existing ones.
The manager responsible for carrying out the finance function needs to keep in mind that the future is always uncertain and it is not possible to estimate an expected rate of return with absolute certainty. In addition to this, he/she has to consider the risk factor. It plays a major role in determining the expected returns a prospective investment proposal is likely to yield.
Investment decisions also involve generating necessary funds from the sale of unproductive assets, which are not yielding any profits. In many cases, it is prudent for a corporate enterprise to depose of depreciated assets that are not adding any value addition to the organization and use the sales proceeds to purchase more productive equipment. In such cases, it is essential to evaluate the opportunity cost of selling off such assets.
Financial Decision
This is another critical activity that the person in charge of the finance department of a business organization needs to carry out. It is crucial for such an individual in consultation with other top managerial personnel of the organization to make prudent decisions on how the establishment should acquire necessary funds in the form of capital. Any true expert specializing in the field of trade, industry, business, and commerce says it is possible for a company to obtain the money it needs for its expansion activities in a variety of ways. Ideally, it is important for such an organization to maintain a proper mix between equity capital and debt. They refer to this as the establishment’s capital structure.
Experienced professionals from esteemed company RemoteDBA.com hold the view that such a business establishment stands to gain when its shares maximize in the capital market. This is because it enhances the wealth of its shareholders and is an indication of its growth. They go on to explain that using debt as an instrument to raise funds from the market affects the risking-taking potential of the organization and the returns of its shareholders. However, in many cases, it may increase dividends on equity funds. In such a scenario, the ideal financial structure should accomplish the goals of maximizing the potential returns of its shareholders while minimizing risk.
Dividend decision
The objective of any business enterprise that carries out its activities in a marketplace is to earn profits or a reasonable return on their investments. In this regard, the key responsibility of the manager in charge of finance in such an organization is to decide to whether distribute the entire profits the establishment earns in a particular year to shareholders or not. In many cases, he/she may opt to reinvest a certain portion of profit within the business and distribute rest to the shareholders. In such a case, he/she needs to determine the most prudent dividend policy. It helps evaluate the optimum dividend payout ratio, which acts as a catalyst in maximizing the overall market value of the business organization. On the other hand, he/she can decide to issue a bonus share of the shareholders in proportion to the number of shares they own.
Liquidity decision
For any business organization, it is necessary to have adequate liquid funds at its disposal at any point in time to avoid becoming bankrupt. In this aspect, the manager responsible for finance in such an establishment need to take into consideration the profitability of the company, its liquidity, and the ability to take risks when it comes to making investments in current assets. He/she needs to maintain a delicate balance between profitability and liquidity when he/she allocates adequate funds in such assets. This is because current assets do not yield any return for the organization, which makes it necessary for the thorough evaluation of existing assets before investing. It is prudent to dispose of such assets if they turn out to be unprofitable.
Finance is an essential activity that not a business organization can afford to ignore if it intends to survive in a competitive market environment. Without adequate money, the other departments of such an establishment cannot function efficiently because it is a vital lifeline. Moreover, there is also a possibility that costs may become unmanageable if the proper mechanism does not exist to control such expenditure.