Impact of Finance on Business Decisions
Finance plays a crucial role when it comes to taking decisions regarding the continued survival and growth of a business. Various decisions regarding the organisation are taken by analysing the financial statements as they help in ascertaining the viability in aspects related to financing. Finance basically serves as an enabler of various business opportunities in terms of expansion, larger market capitalization and a new offering of service.
Companies generally finance its funds through two ways – Equity Financing and Debt Financing. A balanced ratio of debt and equity is maintained in order to avoid future contingencies.
Debt financing includes loans which may be ranging from short term to long term which requires some sort of payment to be made either monthly or yearly.
Equity financing is financing representing an ownership interest in the company including financial instruments such as equity shares, bonds, stock and private investments.
Various analysts are recruited to analyse the financial position and how it can result in meaningful business decisions in this regard.
As we all know, finance directly or indirectly affects the decisions related to business. So it is a vital aspect which is usually taken in consideration in order to arrive at feasible business decisions.
Some of the reasons which are affected by the current financial position of the company are:
It is one of the most important factor that is ascertained by finances of the company. A good financial position indicates that a business is capable to recruit more experienced and well trained professionals that will prove an asset to the organisation in terms of making significant contribution in growth and expanding capabilities of the business. Decisions regarding recruitment should be done quite carefully as each employee involves a dedicated cost that firm has to incur. However, if the firm is having lower profitability, it is not in a position to retain all the employees in the business. In order to recover the finances and improve the financial position, Layoff of employees is performed in which companies trim the manpower in order to stabilize profits.
DECISION REGARDING COST AND PRICING
Costing decisions are also affected by the finances of the company. When there is a recession or crisis, a firm formulates various decisions in respect of cost for retaining sufficient profits and to avoid a situation of bankruptcy. Business might look for elimination of unnecessary expenditure and develop more cost saving and efficient methods for reduction in costs.
Growth is an important factor that contributes to the success of business enterprise. A business constantly strives to grow in the long run. Growth of a business helps to increase revenues profits and margins to an extent. It even contributes to improved image of the enterprise. However, there are various factors of growth that can only be undertaken if the financial position is stabilized and the firm is earning enough revenues to adequately cover its cost. These factors vary widely by industry, size of business, market and even the taste for risk of the management and ownership. Thus it can be said that when the business lacks adequate financial resources growth is unattainable or may stagnate.
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