7 Financial Decisions that Impact Profitability in the Long Run

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Efficient financial management is the pathway to a business’s success. The finance department works hard to clear ways for the company so that they can attain their goals. Their work is the proper measure of an organization’s financial stability and efficiency. It designates them the responsibility of allocating, acquiring, and managing the finances while making important decisions.

The decisions a financial manager makes translate into the proper usage of the resources the company has. These decisions ensure that the company achieves its objectives, grows substantially, and survives in difficult times. Any financial decisions made affect the company in the long run. So some of the decisions that financial management has to make are:

1) INVESTMENT DECISIONS

Investment decisions are the top management decisions related to the allocation of funds to different projects. These projects can relate to the company’s product or service or related to promising investment opportunities. The decision is to decide where and when the company invests. Investment decisions determine the size and influence of the company. They determine the fixed assets, profit retention, and sales. These decisions also affect the company’s credibility and value of the shares. So some factors that affect the investment decisions of a company are:

  • Market interest rates
  • Demand change and growth in the economy
  • Technological developments
  • Capital productivity
  • Finances available
  • Inflation
  • State policies
  • Wage costs
  • Depreciation

Different types of investments include growth investment, shares, property, defensive investments, and fixed interests. Some financial firms and banks invest by giving out loans. The interest rates or markups work as the return on their investment. The community reinvestment act by the US government encourages banks to invest in local communities. One of the leading banks in this regard is bankgreenwood.com that offers you several financial options.

2) DECISIONS ABOUT CAPITAL STRUCTURE

As the name suggests, capital structure decisions include arranging capitals secured from different sources. These decisions ensure that the company can meet their long-term financial needs. So capital structure includes equities, loans, preference share, debentures, and other funding sources that are retained on a long-term basis. So the decisions include the management of the capital, the arrangements, or how it can increase so that the business runs smoothly.

The goal of the management in this regard is to achieve an ideal capital structure. An excellent capital structure balances all the components and affecting factors. Acquiring the perfect structure allows the business to:

  • Lower the capital costs
  • Reduce risks
  • Increase flexibility
  • Transfer credibility and control to the business
  • Increase the value of the company

3) DIVIDEND DECISION

A dividend is the distribution of profits. The decision-makers are the board of directors who decide how to distribute a selected portion of its earnings. The goal of a company is to increase shareholder wealth. So to maintain the faith and support of shareholders, the company has to decide dividend policies carefully. It is necessary and relative to the company’s financial systems as both can directly affect capital cost. So some factors that affect dividend decisions are:

  • Free cash flow
  • Information signaling
  • Clients of dividends

When it comes to dividends and dividend decisions, we can observe a few types, such as:

Stable dividend: A dividend policy in which all the shareholders get the same amount. The amount does not deteriorate by the profits of the business.

Constant dividend: The shareholders get a fixed percentage out of the profit. This policy is best for companies that are growing.

Alternate dividend decisions: 

An alternative to dividend means a non-cash option for dividend sharing. If the resources don’t allow cash dividend, a company may have to dip into their stocks. Only in exceptional circumstances when the company has to manage cash shortage and uphold shareholder expectations is this strategy executed.

4) WORKING CAPITAL MANAGEMENT

Working capital management is vital for a business’s financial stability and health. If a business can manage the working capital, it will balance the company’s profits and growth. So the decisions made regarding working capital aim to maximize efficiency in the company’s operations.

All the decisions made in this prospect involve inventory management, accounts receivable management, and accounts payable management. These decisions work to increase the company’s profits and maintain a smooth, flowing working strategy.

5) SETTING DEBT MANAGEMENT POLICIES

A well-written debt management policy works to achieve your company’s goals concerning debt. Management in this aspect increases the company’s ability to make better decisions and holds a strong point regarding debt obligations. These policies play a vital role in the long-term planning of the company. Better decisions in this regard can ensure the business’s financial stability.

Some critical factors in the debt management policy include:

  • Scope and purpose of debt
  • Usage of debt
  • Types of debt allowed
  • Limitations
  • Debt structure and repayment
  • Debt issuance policies

6) INTERNAL ACCRUAL MANAGEMENT

Accruals are earnings in reserve, or in simple words, the retention of profit. Usually, accruals are known as one of the most pivotal sources of long-term finance. Accruals hold value because they offer stability without any additional markups. Like external sources, accruals won’t need any profit-sharing like dividend or loan interest. Decisions about the accrual funds can save a company from financial instability.

7) ASSET VALUE RETENTION

Asset value retention is essential to the financial stability of a business. Depreciating value is the lowering value of the assets with the passage of time and usage.

An organization stands on its assets, especially if they are a manufacturing unit. Their machinery and production plants are the most important and valuable assets. It is imperative to buy these units with good production outcomes and a longer span of life. The assets impact the smooth workflow of operations, thus enhancing productivity and profitability, meaning their retention plays a vital role.

CONCLUSION

Financial decisions hold a significant impact on the health of a business. Successor loss is all dependent upon financial management and the decisions made in this regard. Each decision mentioned above is the responsibility of finance managers, the board of directors, or top management. These crucial decisions steer the course of the business. These decisions impact every factor. They also have a significant role in achieving business goals and holding credibility in the market. So the key to having a successful business is to make sound financial decisions.

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