ASSIGNMENT 1

CORPORATE FINANCE.

FACTORS AFFECTING FINANCIAL DECISION MAKING.

Submitted ToDr. Anju Singla

Submitted byGaurav Verma 10103012 CSE

Economic theory, at its very root, deals with the analysis of decisions. It is about how to gain value and exploit it. Two central aspects affecting financial and business decisions are the macroeconomic climate and efficiency concerns under competition.

Macroeconomic Variables An important motivator in modern economies is the stability of the broader economy. This affects consumers and businesses alike. The main purpose of all business is profit, and what motivates investment and work is an expected rate of return. If the macroeconomic variables threaten to reduce that return, then investments will drop and unemployment will rise. If inflation is expected to rise, many investment projects will be canceled because rising prices take value away and harm final returns. Example : we can take the example of the Indian economy in which the FDI has reduced due to inflation , legal complexities and low GDP.

Macroeconomic Expectations The concept of "macroeconomic variables" seems vague and general, but it is really about expectations. No one wants to create additional value through labor if that value will be expropriated or destroyed. Inflation can destroy value and negate labor, while lack of a transparent legal order can lead to expropriation of value. Businesses and consumers are confident when their own investment and labor will see a consistent return that is protected both in law and in basic monetary policy.

Efficiency Efficiency serves as another important factor affecting business decisions. This factor becomes more intense in proportion to both the intensity of competition and the decline of market options. The market for portable mp3 players, for example, is saturated with numerous firms from around the globe. Demand remains high, but if economic problems such as unemployment continue to rise, the amount of disposable income for non-essential items will decline. This means that all firms will have to squeeze harder to gain more value from less labor within a declining market. Efficiency will thus become the main concern.

Markets and Efficiency The current market environment helps shape corporate decisions. Efficiency is most important in highly competitive markets because, all else being equal, the most efficient producer is also the lowest-cost producer. That's an advantage in the marketplace. Example : we can take the example of the rise of Micromax Mobiles in the Indian mobile market, this native company has beaten the likes of Samsung and Apple to the leader in selling Mobile devices due to it selling like for like features at a lower price.

-Environment It is very great factor in financial decision making process. These factors may be internal or external that influence business. Buyers, Sellers , government , competitors are likely to act. Thus business also should act.

Say we have a situation where Gold imports are reduced or duties are increased due to slump in the economy. So it is important for the decision maker in jewellery industry and decide whether to continue preference for gold by spending big or adaptation in the designs to inculcate other precious metals that can be available at low cost .

Risk Financial plans are involving a lot of risk. Because businesses are run in an environment of uncertainty so taking risks in financial decisions can severely affect businesses. Say we have a Sports Club who in order to increase its brand recognition worldwide invests in players with high brand value but these players fail at this sports club that doesnt fulfill the desired aim , so risk analysis is an important factor.

Competition or Peer Pressure Competition has a great role in the financial spending of an institution , more the competition more is the variety of products available and more differences in the cost of a product . So it is important to challenge the competitors in the market in the eyes of the customer and to be ahead of the them or be just a step ahead.

Say a competitor has invested in a new technology for packaging of its products that makes the product look more compact and elegant that suddenly boosts up the competitors business so it becomes necessary to take a decision to invest in that technology in order to remain competitive.

Purchasing capacity of the target buyer For any business to flourish it is necessary that its service or product is within the economic capacity of the target group. Also there must be considerations regarding the unemployment in that group as unemployment will reduce the availability of funds in order to purchase non necessary or luxury items. The spending on such items will reduce and thus can lead to decreased sales. Example : The new iphones that targeted a middle income group were launched in India at a price of more than 30 k a figure that is quite huge for the target that led to slow sales. The company had to then relaunch the device again at a reduced cost. So it is important to take into consideration whether purchase of product will be appropriate or not.

Company Ethics and Morals: Company has to follow its ethics and policies in order to maintain goodwill in the market . Say a company refrains to do business with a company involved in some serious issues involving accidents or human killings like Bhopal Gas Tragedy.

Economic Restrictions or Policies Economic policies can play an important while allocation of funds in a budget , say a policy that prevents a company to spend more than its garnered revenues in any case (even for expansion). There are some company takeovers where a smaller party took over a bigger business , with above mentioned restrictions

such a merger might not be possible so economic restrictions can play a major role in financial decision making. Other example can be FIFA Financial Fair Play policy that restricts a club to spend more than revenues only to a state when its debt is lesser than 60 million pounds. Sources:

1). http://www.russellsage.org/research/special-initiatives/great-recession/greatrecession-rfp 2) http://www.slideshare.net/deborahburns/102-factors-affecting-financialdecisions-burns 3) http://wiki.fool.com/What_Are_Two_Economic_Factors_That_Affect_Financial_D ecisions%3F 4) http://www.studentpulse.com/articles/180/decision-making-factors-thatinfluence-decision-making-heuristics-used-and-decision-outcomes

5)http://wiki.answers.com/Q/What_are_the_factors_influencing_the_decision_ making_process_during_financial_planning_in_business?#slide=12