Financial Decisions That Lead To Successful Organizations
The life of a businessman is not easy. It seems to be invigorating, independent, and a gateway to earn lots of wealth. But on the other side, it is not an envious picture. Entrepreneurs are on their toes all the time, dealing with multiple challenges at the same time.
They need to be hard-working, showing a lot of courage, demonstrating patience, and taking many risks. Yet many brave people opt for starting or running their businesses rather than settling for easy and steady employment.
Every great entrepreneur or front player of a successful organization will tell you that it is not an easy thing, and higher purposes and matchless passion drive them. Without such hearty notions, any sane man would not dive into this battle. In addition to such passion, it also requires technical expertise and business acumen to keep the ship afloat.
Business owners need to deal with external pressures like consumer behaviour, economic turmoil, etc. and manoeuvre accordingly. Similarly, there are many internal matters they have to deal with, like sales, manufacturing, human resources, supply chain, etc.
All of them are separate domains and departments and consists of depth of their own. Any major lapse in judgment or decision making would significantly deter business progress and development.
Similarly, one of the biggest drivers of business growth and success for an organization is finance. Finance is a crucial department just like other departments. But it is the one that drives other functions, or in other words, every department is dependent on the finance department’s direction. And it also deals with external statutory and monetary authorities.
It aligns the business as per their stated policies, for example, conducting audits or provides detailed business plans to complete small business loan requirements. Usually, business owners are directly involved in the financial matters with CFO or Head of Finance to manage the hypersensitive matters of the business.
Unlike other domains of the business, financial decisions impact the business activities and its pertaining future directly, and it affects or improves the bottom line of the business in a quick time. Therefore, a business must make financial decisions with careful considerations that ensure the success of the business altogether.
Let’s explore some of the financial considerations and decisions required to lead businesses towards success.
Business Model And Planning:
No business can operate and attain growth without a clear understanding of their business model. The business model includes revenue generation mechanism from the product or service you offer, revenue model, target customer base, product categorization, departmental budgets, etc. It allows companies to have a clear direction for the period to focus on the operations and not to dwell again and again for the strategic part.
Once the business model is identified, successful organizations revisit their business model either in 2-3 years or in case of any major shift in the industry or unexpected event in which business can’t be run as per the norms. In the business studies and market realities, it is said that the success of any product or idea relies massively on its business model and planning.
Skilled Financial Personnel:
The personnel of the finance department is crucial for organizational success, especially the finance manager. All the financial decisions are made based on financial and managerial information prepared and provided by the finance personnel.
Any lapse in preparation or provision of such information can seriously affect the quality or direction of decisions made by the senior members of the organizations. Similarly, wrong decisions regarding capital investment or capital financing by finance managers can also lead the organization towards adverse scenarios or even bankruptcy.
This is why companies design strict and comprehensive recruitment criteria for the hiring of finance personnel. And in most of the countries, the finance managers are required to be a certified chartered accountant as per the local accounting and finance bodies to ensure professionalism and quality standards of services.
Analysis Of Financial Ratios And Financial Statements:
Just like medical tests of a human body reveal the true condition of the health. Similarly, accounting ratios and financial statements carry real insight into a business’s financial health. To operate effectively and grow exponentially, periodic analysis of regularly maintained accounting ratios is required.
Accounting Ratios provide insights into a company’s liquidity, profit margins, debt to equity ratios, etc. Successful companies regularly analyze these ratios and decide their line of action in the light of such analysis.
Similarly, financial statements provide details of the company’s financial position and financial performance. Along with finance managers, business people analyze their business and also use financial statements to compare their performance with the competitors and the economic climate of the industry.
These financial statements and underneath analysis determine the company’s position in negotiations with banks for financing, taxation allowances or rebates, etc.
It’s a piece of timeless advice that we should always save for a rainy day. To ensure some safety for the times of unwanted emergencies or exigencies, companies allot and preserve some funds and reserve in the name of emergencies.
The amount depends on the size of the company and the magnitude of its operations, but typically it is around 3-6 months of operational expenses. Companies don’t save this fund in the form of cash or redundant asset, but keep it in the form of profit-generating assets with high liquidity.
Financing Options At Optimum:
To operate effectively, successful companies try and ensure to keep their finance cost as low as they can. Equity financing cost is higher as shareholders want dividends, plus they can influence the business decisions through voting rights.
Whereas debt financing is cheaper, and lenders only lend as per their limits and usually attach unwanted loan covenants. Therefore, it is not simple to devise an ideal financing ratio, and businesses always stay on the hunt to improve their financing ability, like trying to extend the payment period or prolong receivable period, etc.
As discussed in the beginning, the effectiveness of financial decisions is the make or break for any business. And successful businesses keep a closer eye on such matters to ensure smooth execution and consistent growth of the organization.