Today, entrepreneurs have to manage different facets of a business. They have to build an impeccable online presence through digital marketing. Similarly, they have to recruit a team of talented and high-qualified employees to run operations smoothly. Most importantly, they have to make clever financial decisions to save the company from threats of insolvency or bankruptcy. After all, finance impacts business survival and growth in the long term.
One wrong decision regarding debt financing or investment can put the entire firm in jeopardy. Likewise, any mistakes relating to business costs or pricing will weaken the foundation of the business. Therefore, entrepreneurs have to be extra vigilant when making decisions regarding finances. In addition to allocating the budgets, you have to analyze financial statements and data to determine where the company stands.
Intelligent financial decisions serve as an enabler of different business opportunities. Perhaps, you can expand, increase market capitalization, or diversify. However, if you are unaware of this, have a look below. Here we are unfolding the impact of financial decisions on a small business.
1. Profitability
The ultimate goal of every business is to maximize profits. Most entrepreneurs develop unique products and services to fulfill this goal. Still, nothing works until you have a viable financial strategy. The decisions regarding profit margins will determine the amount of money your business can make. For instance, generating profits won’t be possible if you decide to put a price ceiling on product offerings. Likewise, offering discounts without cost analysis will further decrease profit margins.
Therefore, you have to assess your financial decisions critically. For that, you have to equip yourself with financial expertise. These days, online programs and schools have made it effortless to acquire knowledge. Hence, feel free to explore eLearning educational opportunities. If you have a bachelor’s degree, look for MBA finance online degree to improve your financial decision-making skills.
2. Capital Structure
Often, financial decisions revolve around improving the company’s capital structure. Maybe, if your company has taken unsecured loans from microfinance banks, you have to try arranging capital from secured sources. In simple words, these decisions make sure that the business can fulfill long-term needs. Thus, any discrepancy in decisions relating to the capital structure would lead to business failure.
On the other hand, smart decisions can lower capital costs for the company. Finding reputable debt financing sources will reduce interest expense, improving the capital structure. In addition, it would reduce the risk of default and enhance flexibility. Having a competent capital structure can also increase the credibility and value of the business. Hence, make sure your financial decisions acquire the perfect capital structure to make your small business succeed.
3. Cost & Pricing
The decisions relating to costs and prices come under the umbrella of financial decisions. Analysts and financial managers sit together and work on the cost and price of every product. At times, they keep the prices high enough to earn profits without considering the target market’s purchasing power. As a result, the business fails to generate revenues because the prices are high. In some instances, the prices are set too low, failing to cover the costs.
The inadequate cost and pricing decisions directly impact business profitability. Hence, the finance experts have to be sure before they finalize the price. Alongside considering the costs and margins, they have to consider the affordability levels. Likewise, check out the prices your competitors offer and try to beat those prices.
4. Business Growth
Besides profit maximization, business growth is also one of the primary goals of every entrepreneur. After all, it contributes to the success and image of the enterprise. However, growth and expansion are only possible when the company has a stable financial position. Your business should be earning enough revenues to cover costs and generate profits. Likewise, you have to make competent financial decisions that can facilitate growth.
Your decision regarding equipment financing might seem profitable until you conduct a cost-benefit analysis. Equipment financing will drown your business into losses if the company cannot repay the principal amount with interest. But on the brighter side, if your business generates enough profits to repay the loan, the new equipment will increase production capacity.
5. Working Capital Management
Is your business facing cash flow issues? That’s an outcome of poor financial decisions relating to working capital management. Entrepreneurs fail to acknowledge rising current liabilities that create problems for the business later. To avoid this problem, you have to make working capital decisions to maximize operational efficiency. From inventory management to accounts payable – your financial decisions should account for everything.
Effective working capital management will ensure your small business has enough funds to manage routine tasks. In addition, it will improve the profitability and liquidity position of the company. Moreover, having enough working capital available will also eliminate the need for external financing. As the business will have sufficient cash in hand, you must acquire loans to incur day-to-day costs.
Final Words
Undeniably, financial decisions hold the power to make or break a business. Thoughtful decisions regarding prices, costs, and profitability will ensure the company remains afloat in the long run. In contrast, having an abrupt capital structure might create liquidity problems. Therefore, entrepreneurs and finance managers have to make smart decisions regarding finances to make the business thrive.
