Financial Decisions
Financial decisions refer to the choices made by a business regarding the allocation of funds and resources. These decisions typically involve evaluating investment opportunities, determining capital structure, managing cash flow, and assessing risk. Effective financial decision-making is crucial for achieving the organization's financial goals and ensuring long-term sustainability and growth.
8 Key excerpts on "Financial Decisions"
eBook - ePub- Jenny van Sten-van't Hoff(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...5 Financial management aspects 5.1 The investment decision 5.2 Working capital requirements 5.3 Capital structure 5.4 Financing needs 5.5 The dividend decision 5.6 Market risk 5.7 Currency risk 5.8 Credit risk 5.9 Visionplanner The function of finance includes three major decisions a company must take: the investment decision, the financing decision, and the dividend decision. Each must be considered in relation to the objective of creating value. The chapter starts with discussing the investment decision (5.1). Investments often involve working capital. Working capital requirements are discussed in section 5.2. Once the investment decision has been taken, the necessary finance needs to be raised. The financing decision influences capital structure, which is analysed in section 5.3. Financing needs are discussed in section 5.4. The major decision in corporations of whether to pay dividends to shareholders is dealt with in section 5.5. The final sections in the chapter relate to three types of financial risk: market risk (5.6), currency risk (5.7), and credit risk (5.8). If relevant, the chapter indicates the link to the software and the last paragraph summarises the relation between the software and the book. 5.1 The investment decision Value The objective of a company is to create value for its owners and other stakeholders. The idea is to acquire assets and invest in new products and services where expected return exceeds their cost. Spending for new facilities, such as plant, equipment, computers, vehicles, is a long-term investment that reflects confidence in the business. The profitability of these investments affects the value of the firm...
eBook - ePubStart-Up Guide for the Technopreneur
Financial Planning, Decision Making, and Negotiating from Incubation to Exit
- David Shelters(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...Therefore, judicious assignment of decision makers to the various decision-making bodies serves two important purposes: optimal financial decision-making and attracting more investment funds. Once financial decision processes have been thoroughly examined and understood and the financial decision-making structures have been established, effective financial decision-making may commence. Financial Decision Making in Practice There are five primary areas of financial decision-making of importance for an entrepreneurial venture: strategic financial planning/fund-raising, budgeting, operational Financial Decisions, financial dealings with external parties, and exiting. We discuss the decision-making to be conducted in all five areas based on strategic thinking and established best practices. Strategic Financial Planning/Fundraising As mentioned in Chapter 4, there are many benefits associated with sound financial planning. Those that are related directly to financial decision making include assessing what is or is not financially feasible from a business planning/operational perspective, ascertaining the amount of funds that need to be raised, and securing such funds in a timely manner and on the most favorable terms. The objective is to determine a progression of related financial and operational objectives that, if achieved, will result in maximizing ROI upon exit, the ultimate objective. The decisions are deliberated at the strategic level with input from the board, representing shareholders (i.e., ownership), the CFO (as presiding officer), and select relevant executives. For entrepreneurial ventures, the participants usually include the founding board and executives as such planning should be conducted at the very beginning of the venture. There are several considerations for decision makers before they make decisions related to strategic financial planning and raising investment funds...
eBook - ePub- Sandeep Goel(Author)
- 2019(Publication Date)
- Routledge India(Publisher)
...Part V Financial management 12 Nature of financial management Almost everything in life eventually boils down to the rupee sign. Money, and therefore, finance, is an integral part of life. 1 It is equally applicable to a business organisation. The success of business depends upon the efficient financial management. Therefore, every business enterprise needs to be efficient in managing its finance. They need to ensure that adequate funding is available at the required time and invested into the right projects. What is financial management? Financial management is the process of acquisition and disbursement of funds. It includes all the activities relating to planning, organising, directing and controlling the funds of the enterprise. Elements Investment decision – It implies the allocation of funds into various assets of an undertaking. The investment in fixed assets is called capital budgeting decision and the investment in current assets is called working capital decision. Financing decision – It refers to the process of raising funds from various sources depending on factors, like cost of funds, control, liquidity and so forth. Dividend decision – This decision involves the distribution of net profit of business. The finance manager decides what percentage of profits would be distributed as dividend to shareholders and how much profits to be kept aside as reserves for future contingencies. Objectives of financial management The main objectives of financial management are: Profit maximisation: It is the core objective of financial management...
eBook - ePubThe Capital Budgeting Decision
Economic Analysis of Investment Projects
- Harold Bierman, Jr., Seymour Smidt(Authors)
- 2012(Publication Date)
- Routledge(Publisher)
...Since the managers of a corporation should be acting on behalf of the common stockholders, the managers have a fiduciary responsibility to the stockholders. The common stockholders, the primary suppliers of the risk capital, have entrusted a part of their wealth to the firm’s management. Thus the firm’s success and the appropriateness of management’s decisions must be evaluated in terms of how well this fiduciary responsibility has been met. While we define the firm’s primary objective of the firm to be the maximization of the value of the common stockholder’s ownership rights in the firm, we recognize that any corporation is likely to have other objectives. Investment Decisions Business organizations are continually faced with the problem of deciding whether the current commitments of resources are worthwhile in terms of the present value of the expected future benefits. If the benefits are likely to accrue reasonably soon after the expenditure is made, and if both the expenditure and the benefits can be measured in dollars, the analysis of the problem is more simple than if the expected benefits accrue over many years and there is considerable uncertainty as to the amount of these benefits. We shall use the term investment to refer to commitments of resources made in the hope of realizing benefits that are expected to occur in future periods. Capital budgeting is a many-sided activity that includes searching for new and more profitable investment proposals, investigating engineering and marketing considerations to predict the consequences of accepting the investment, and making economic analyses to determine the profit potential of each investment proposal. Corporate managers have to decide on the direction their corporation will go (strategic decisions) as well as how to implement the strategic decisions (tactical decisions). We describe both types of decisions with the term capital budgeting decisions...
eBook - ePub- Robert Irons(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...Research also shows that the costs of brain drain are often underestimated by firms. The techniques offered to firms to help prevent brain drain are based on developing better relationships with its employees. This same approach can be used to develop better relationships between the firm and all of its stakeholders. The better the relationships the firm has with its stakeholders, the smoother the path to achieving the firm’s goals. Types of Financial Decisions Decisions within the responsibility of the CFO fall into three general areas: capital budgeting, working capital management or capital structure. Questions therefore tend to relate to: How do we invest long term to implement our strategic plan? How do we manage our funds in the short term to support production? How do we obtain the funds that we need? Capital budgeting decisions involve large initial purchases and large cash inflows from sales revenue over an extended period of time. Each decision of this type commits the firm to utilizing the assets for years, so if the decision works it can be quite profitable, while if it doesn’t work it can be quite expensive. Such decisions need to be made carefully, with accurate analysis using reasonable assumptions. By investing in positive NPV projects, the firm will be able to continue to grow over time. The nature of those projects depends to some extent on the industry the firm is in. For any large retailer, like Wal-Mart or Costco, deciding whether to open a new store would be a typical capital budgeting decision. In the case of Hewlett Packard, the decisions to merge with Compaq in 2002 and to acquire Electronic Data Systems in 2008 were large, complex capital budgeting decisions. Working capital refers to current assets and current liabilities, the short-term balance sheet accounts used to support day-to-day operations...
eBook - ePub- Alan Parkinson(Author)
- 2012(Publication Date)
- Routledge(Publisher)
...A decision to make large-scale investments over a number of years may ultimately reap huge rewards for an organization. However, given that information about investment decision-making is made public at best through press releases, company bulletins and financial statements, there is plenty of scope for misinterpretation. As a consequence, heavy cash outflows may cause anxious investors to react in a way which reduces the market price of the shares. Managers who are aware of this might well opt for what could be regarded in the absolute sense as a suboptimal decision, with the short-term effects appearing favourable in conventional accounting terms. Families of decisions It is often difficult to disentangle one decision from another. For example, new capital investment may require new funding sources to be found. In practical terms, the two decisions are understandably linked. It might be appropriate for managers to build a framework for decision-making which separates the costs and benefits of one decision from another, but also allows for the fact that there is bound to be some reciprocal influence. All of the above would need to be incorporated within a financial framework which will provide information to managers to enable them to improve their investment decision-making. The actual framework devised and adopted by any one management team will, understandably, be influenced by a number of factors peculiar to that one organization (in addition to the more general factors). The aspects revealed above require a quantification. This happens in Chapter 7, but it is important to recognize that, in planning for the long-term future, the factors taken account of may well change as the future becomes now, and does not turn out in the way a management team might have thought it would...
eBook - ePubThe Power of Accounting
What the Numbers Mean and How to Use Them
- Lawrence Lewis(Author)
- 2012(Publication Date)
- Routledge(Publisher)
...This is true, but such a statement could lead one to the conclusion that there is only a short run and a long run and nothing in between. In reality, the budgeting process encompasses a continuum, as Figure 5.1 illustrates. Figure 5.1 Capital Budgeting Decisions Decisions relating to capital expenditures are not easily reversible. They generally involve large sums of money and long periods of time. So a poor decision of this sort is going to cost a lot of money and it is a decision you are going to have to live with for a long time. Not surprisingly, these are often thought to be among the most important decisions an organization can make. More than one organization has declared bankruptcy solely because someone or some committee made a poor capital budgeting decision. Take a trip through your local industrial district and note the shuttered factories and warehouses. In how many cases had someone miscalculated their firm’s future cash flows? Short-term decisions relate more to day-to-day operations, while capital budgeting involves strategic decisions that affect long-term goals. Capital budgeting decisions may include decisions to buy or not to buy major pieces of equipment, to buy equipment from one manufacturer instead of another, to buy one machine versus a similar one, to introduce or not introduce a new product line, to expand overseas, to build a new plant and so on. Both short-term and long-term decisions should utilize incremental analysis. In our discussion in the previous chapter we stressed that when making short-term decisions we want to rely only on relevant information. And we defined relevant information as “expected future information that varies amongst alternatives.” The same approach and the same rules apply equally to long-term decisions...
eBook - ePubAccounting and Finance for Managers
A Decision-Making Approach
- Matt Bamber, Simon Parry(Authors)
- 2017(Publication Date)
- Kogan Page(Publisher)
...10 Financing decisions OBJECTIVE To provide an understanding of the different sources of finance available to businesses and the theoretical and practical factors that underpin financing decisions. LEARNING OUTCOMES After studying this chapter, the reader will be able to: Differentiate and evaluate the different sources of finance available to a business. Understand the relationship between risk and return and the need for a range of finance products that offer a range of risk levels. Identify and evaluate appropriate financing strategies. KEY TOPICS COVERED Types of equity finance. Types of debt finance. Calculating the cost of capital. The capital structure decision. Practical considerations of raising finance. MANAGEMENT ISSUES Managers need to appreciate the range of sources of finance available to a business and to distinguish which sources are the most appropriate for a given situation. They need to understand the impact that financing can have on the profitability of the business. Introduction This chapter is concerned with the capital structure decision of a business. It addresses one of the fundamental questions of financial management, which is: ‘How should a business be financed?’ In this chapter we address this question firstly by identifying the different sources of finance available and then by examining the factors that determine the optimum mix of finance. Fundamental dynamics of finance: risk and return Both investors, that is to say the providers of finance, and those seeking to raise finance will be looking for the best deal they can obtain. Such a deal will be measured in terms of the risk and returns involved. By risk, we mean the risk that the expected level of return is not received. For the investor, the highest level of risk is that not only is a financial reward not received from the investment, but also the amount invested is lost. Return is normally measured as a percentage of the initial investment...
