Question

Identify and briefly describe three (3) of the most important areas of financial decision making that are important to an effective business operation. Briefly define what each area includes and why it very important to the successful operation of a business operation.

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Identify and briefly define three (3) of the most important areas of personal financial decision making that are important to individuals. Define what each area includes and why it is very important to individual financial success. What important business financial decision making techniques can be applied to the specific areas that you have identified?                         

Financial Decision Making Techniques

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Answer 1

Three important areas for business operation:

• Investment decision: selection for proper assets in which company should invest is an important decision. This will decide how the funds of the company are utilized effectively. And also there may be various kinds of risks associated with a particular investment option and if the company is not exercising proper care, all the resources of the company will be wasted.
• Financing decision: this is deciding the sources from where the company can get funds to meet its investment decisions. This can probably be the debt equity ratio. If the company goes in for more debt, it places a risk on the shareholders and on their dividends. The financing decision plays an important role in deciding the capital structure for the company i.e. the prober balance between debt and equity.
• Dividend decision: it is most crucial for any companies decide on their dividend payment. This is because if no dividend is paid, the shareholders will not be satisfied; the market for the shares will be affected resulting in financial crisis. On the other hand, if too much of dividend is paid, the company will not be having its self financing option and must depend more on outside sources for its financial needs.

Three important areas for personal decision making:

• Resource allocation decision: this is nothing but how the money available on hand is allocated to various household expenses that is incurred every month. This is necessary to ensure that the amount is not spent lavishly on a particular thing to enable savings at the month end.
• Investment decision: similar to companies, individual investment decisions are also important. This is because a person faces great difficulty in earning money and if it is not invested properly, and then it would be a waste. Hence a person must select those options which are risk free, providing him adequate returns etc.
• Areas like retirement planning, tax planning etc. this is necessary for any individual. It is always better to save for the future to meet any any unforeseen contingencies and also tax planning; this is the most important thing for any individual. He has to be aware of the tax saving schemes so that he can reduce his tax burden which in turn will increase his savings. And he can also try to invest In tax exempt schemes to get benefits.

Decision making techniques for business operations:

• Cost benefit analysis – this is an important technique for any business particularly when it is deciding on its investment, dividend and financing decisions. This is used for evaluating various alternatives and arriving at the best one suitable for the business.
• SWOT analysis: required for any company to know its strengths, the areas in which it is week, opportunities available and also the threats it faces.
• PEST analysis: this includes political, economic, social and technological factors. This will help the companies in making good decisions particularly on its investment by considering the external factors.
• T Chart – useful for both financing and investment decisions. This is because it considers both pros and cons of an option and ensures that a best decision is arrived at the end.
• Decision matrix: here all the factors of a particular decision are listed in a table and then they are rated with numbers. A final score is then arrived to decide which option is the best one for the business.