Content Filtrations 6. ADVERTISEMENTS: The consumer behaviour or buyer behaviour is influenced by several factors or forces. External factors refer to environmental factors within which a business enterprise has to operate. Various alternate sources are available and businessmen have a freedom to decide about the optimal financing mix so that cost of capital is reduced. The equity capital to be subscribed, in any issue to the public, by promoters should not be less than 25 percent of the total issue of equity capital for amounts up to Rs. There is also a strong possibility for the management to adopt conservative dividend policy during boom periods so that the firm may get sufficiently large amount of resources to finance growth requirements. Find out how to make better decisions by understanding the science and research behind decision making and the factors that affect our choices. The following external factors enter into decision making process: At a time when the entire economy is enveloped into state of uncertainty and there is no ray of hope of recovery in the ensuing years, and considerable amount of risk is associated with investment it would be worthwhile on the part of a finance manager neither to take up new investment activities nor to carry further the expansion programmes. In such circumstances too the management must not be liberal in dividend distribution at least for some years even though a sizeable profit has been earned. That is why shareholders particularly those in the high income tax bracket prefer to receive dividends in shares rather than in cash. Start a free trial. As risk increases, higher and higher discount rates are employed. Instead, he must call on the expertise of those in charge of production and marketing. 5. There are five questions that support any understanding of consumer behaviour. The management does not encounter any problem in persuading the shareholders who are few in number to agree to their policy. Inflation causes increases in business expenses such as rent, utilities, and cost of materials used in production. Similarly, decision regarding allocation of funds as between different types of current assets cannot be taken by a finance manager in vacuum. For instance, decision to acquire a capital asset is based on expected net return from its use and on the associated risk. Degree of stability in level of earnings is a potent factor influencing dividend policy. Because of difficult access to external sources of financing, smaller organisations have to depend on internal sources of financing and for that matter the management may pursue conservative dividend policy to retain larger proportion of business earnings. Economic life of business. When unemployment is low, consumer spending tends to be high because most people have income to spend, which is good for businesses and helps drive growth. Similarly, public utility concerns and industrial concerns manufacturing essential products because of their steady and slow rising earnings may pursue liberal dividend policy to declare higher dividend rate. What Is a Business Cycle & Why Is It Important? Size of business. This would consequently increase cost of capital of the firm. Motivation . Supposing a firm has large number of investment projects with vast earning potentialities sufficient to exhaust its earnings and the shareholders of the firm have strong preference for current dividends a finance manager in such situation must impress upon the shareholders about the strong need to retain more and more earnings and pursue strict dividend policy. These factors are difficult to measure but are powerful enough to influence a buying decision. Concept of Financial Decisions: ... A wise management adopts policies that will be most suited to the present and prospective socio-economic and political conditions of the country. Strict tax policy discourage investment on the other hand tax incentive, tax exemption and invest allowance and easy tax submission fuel the investment. Sole proprietorship firm cannot finance its else from the stock market. For a risk-less investment, risk-free discount rate is employed. Management desiring to maintain control of the firm would like to raise additional funds needed by means of debentures and preferred stock which do not affect controlling position of the management in the firm. A finance manager must ascertain in advance as to which method will be helpful in minimising the tax burden. For instance, financial corporations in India usually insist on maintenance of debt-equity ratio for medium and large scale project as 1.5:1 and promoter’s contribution of 20-25 percent of the project cost while considering loan application of a firm. Economic condition of the country influences financing decision also. They also draw upon a part of the reserves built out of the past earnings for covering their additional financial needs. There may be, on the other hand, investors who are not as liquidity conscious, venturesome and who have greater preference for profitability. What Causes Business Expansion & Contraction in the Business Cycle? Economical conditions. All rights reserved. Under such a condition, a firm seeking loan from the financial institutions must maintain the ratio of debt to equity at a level desired by them. There are different methods of inventory valuation, viz., LIFO, FIFO. Probabilities of Regular and Steady Earnings: While planning about the make-up of capitalisation and deciding about the relationship between debt and equity the finance manager must visualize the trends of earnings of the firm for the past few years. Decisions regarding magnitude of funds to be invested to enable a firm to accomplish its ultimate goal, kind of assets to be acquired, pattern of capitalization, pattern of distribution of firm’s income and similar other matters are included in financial decisions. at Harvard – 2015, Vol. Other companies have freedom in pricing their public issues, provided certain conditions are fulfilled. 7. As against the above, the decision relating to acquisition of funds for financing business activities is primarily a finance function. 1 ISSN: 2330-1236. Periods of high consumer confidence can present opportunities for new businesses to enter the market, while period of low confidence may force companies to cut costs to maintain profits. It would, therefore, be in fitness of things to take the decisions in the light of external and internal factors. Theories on the Causes of Business Cycles. Dividend distributed in shares is popularly known as bonus shares. While deciding to invest in projects, a finance manager has to keep in view the existence of tax incentives. castesim. 8. What Are the Characteristics of Each Stage of the Business Cycle? The shareholders should also have no objection in such policy because this will help minimize their tax liability. Where dispersion of outcomes is known and all projects are equal in risk, finance manager would naturally go for that investment proposal which leads to highest revenues in relation to cost. Structure of assets. Management of such companies would not choose to burden themselves with fixed charges. In manufacturing and public utility concerns bulk of the funds have to be employed in acquiring fixed assets while in trading concerns substantially large amount of funds is invested in current assets, and fixed assets claim a nominal proportion. However, on a closer scrutiny it would appear that the present value of tax savings in initial years would always be higher than the present value of the additional tax liability in the subsequent years. 2. When earning of the firm fluctuated violently in the past and the future earnings cannot be predicted with reasonable certainty, it will incur risk in issuing debt. 4. Impact of each of these factors upon financial decisions will now be discussed in the following lines. When a person is motivated enough, it influences the buying behaviour of the person. Government control. Consequently, new enterprises have to encounter considerable problems in assembling funds from the market. But in public limited companies having large number of shareholders with varying desires the finance manager must insist on the pursuance of liberal dividend policy. Social factors 3. Firms with sufficient amount of fixed assets must rely on debt to take advantage of cheaper source of financing. Capital Market: Strong money and capital market provide money with less cost and financing form the stock market can influence the decision also. Thus, there is every likelihood of relatively greater amount of dilution of debt in the capitalisation of older firms. Internal factors refer to those factors which are related with internal conditions of the firm such as nature of business, size of business, expected return, cost and risk, asset structure of business, structure of ownership, expectations about regular and steady earnings, age of the firm, liquidity in company funds and its working capital requirements, restrictions in debt agreements, control factor and attitude of the management. There can be plenty of factors influencing policy making in a country. High corporate tax rates lower the amount of earnings left for dividend distribution which, in consequence, tend to lower dividend rate. External factors influencing the financial decisions are- 1. 1. In this way after making appropriate adjustments for risk factor final course of action is chosen. Nature of business. Topic: DECISION MAKING. Under such condition, greater emphasis should be laid on internal financing and for that purpose reserve position of the company will have to be strengthened. Prudent dividend policy in such concerns is one that lays more emphasis on greater retention of earnings so that the firm could build huge reserves in periods of prosperity and the same could be utilised to maintain dividend rate at times when earnings of the firm nose-dive. i) Who is the market and what is the extent of […] Under such circumstances a finance manager has to consider the viability of only those projects which are permissible by the Government. 3. When earnings of the firm fluctuated violently in the past and the future earnings cannot be predicted with reasonable certainty, it will incur risk in issuing debt. Gregory Hamel has been a writer since September 2008 and has also authored three novels. Save my name, email, and website in this browser for the next time I comment. Factors influencing financial decisions are discussed in two different ways. Week 7. Taxation is the most predominant factor influencing business decisions since it takes away bigger slice of business income. Basic Factors Influencing Financial Decisions. Furthermore, the firm’s ability to adjust sources of funds in response to major changes in need for funds increases. Dividend policy of a firm should also be attuned to changing economic conditions. Personal factors! Economic life of business: people keep faith on old business entry rather than newly formed entity. He has a Bachelor of Arts in economics from St. Olaf College. Size of Business: Large size of organization invests more money to acquire fixed assets due to its huge capital. How to Fix Windows XP Without a Toshiba Disk, Advantages Small Companies Have Over Large Companies, Four Variables That Affect the Business Cycle. Thus, the greater the dispersion of outcomes, higher the discount rate is employed which means that returns will be reduced at a higher rate because of the allowance made for the risk assigned to the eventuality of their realisation.

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