Question

How does the financial strength of an organization influence decision making and outcomes?

Answer 1

The Decision-making process of an organization is affected by several factors including its objective, vision and mission statement, and availability of resources. Many of the same factors affecting decision making apply, from simple decisions to complex solutions that can make or break a business. The financial aspect of an organization also plays a very crucial role in the decision-making process and the outcome. The financial aspect of an organization mainly governs its investing, lending, and corporate governance decisions. The financial aspect of the organization is of great importance to practicing managers. The most crucial decisions for business are related to finance.
There exist an inseparable relationship between finance on the one hand and production, marketing, and other function on the other. Almost all kinds of business activities directly or indirectly, involve the acquisition and use of funds. The function of raising and using money has a significant effect on other functions, yet it need not necessarily limit or constraint the general running of the business. A company in a tight financial position will give more weight to financial consideration, and devise its marketing and production strategies in the light of the financial constraint. On the other hand, management of a company that has a regular supply of funds will be more flexible in formulating its production and marketing policies.
Investing decisions of a company largely depend on the company’s accounting statements including balance sheet and profit and loss account. It helps in understanding the financial health of the company. It would also help to determine whether starting a project or a new business division would be feasible or not.
Lending decisions of a company would be governed by the financial ratios of the company like debt-to-equity ratio, fixed asset ratio, interest coverage ratio, etc. Creditors, banks or other financial institutions would analyze a firm’s financial ratios before lending them money.
Corporate governance activities of a firm are also influenced by a company’s financial accounting practices. The managers need to consider the financial aspects of the organization for taking the budgeting decisions. Besides it is also crucial to determine the firm’s short as well as long term business strategies.