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Business Financing and Decision-Making

Business financing is an action of funding a business activity, whether it is starting a new business, running, or expanding an ongoing venture. Regardless of the business type or size, a need to provide resources as an enterprise requires procuring items such as equipment, buildings, office furniture, and machinery. When a business is opening, it borrows money from financial institutions and banks or brings on board additional investors or individuals to share ownership in the new company.

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Accounting: Decision-Making by Numbers

Accounting is a system of organizing, recognizing, reporting, and analyzing information concerning a business’s financial transaction. The system’s objective is to offer its user appropriate and timely information that can help make informed economic decisions. Accounting provides critical information to both external and internal stakeholders of a business. The income statement, balance sheet, and statement of cash flows are the key output of financial accounting and assist external stakeholders such as creditors and owners in examining business financial performance.

Accounting stem from the evolution of civilization, and its development coincides with human progression. Financial statements comprise the vital information used to make financial decisions (Cepêda and Monteiro 363-380). Available data for internal consumption can be helpful for external financial users also. Structured representation of the business’s financial position, changes, and performance deliver crucial information for assessing the effects of numerous factors on previous and future decisions. Running a business requires accurate information concerning records, data, analysis, liabilities, and profits; that is why accounting matters.

Finance: Acquiring and Using Funds to Maximize Value

The business need to acquire funds to finance its operations in multiple purposes, such as short-terms requirement like salaries, and long-term needs like building and machinery projects. Somehow the business will have several rising financial capital needs, including owner’s contribution, loans from banks, reinvestment of earning, and credit from suppliers. Ordinarily, the frequently accepted objective of financial management is to enhance the company’s value to its owners. Therefore, finance managers have an ethical and legal obligation to make decisions that have the business’s best financial interest to owners.

It is prudent for the finance manager to consider the amount of debt that is not detrimental to the running of the business. Ideally, the capital structure denotes the extent to which the company is dependent on various forms of equity and debt to meet its financial obligation. Owners provide equity through their contribution, while external lenders or creditors offer debt financing. Stockholders are the ones whose resources are at risk; therefore, increasing the value of their investment in the business is paramount.

Financial Markets: Allocating Financial Resources

Reviews on the resource allocation procedures emerged in the 1960s, as researchers tried more accurate depictions of investment decision-making. A well-known financial resource allocation procedure portrays a multistage, complex, whereby managers at different corporation levels possess divergent information and play numerous roles (Maritan and Lee pp. 2411-2420). Resource allocation is a critical step in the business strategy as it entails working out the exact financial resources company requires to achieve its particular goals.

Money markets allow businesses to borrow funds on a short-term basis, while capital markets permit corporations to obtain long-term funding to support expansion. The financial resources borrowed from money markets are used for usual operating expenses to cover a transitory period of liquidity. The financial market is a collective possibility of sellers and buyers of financial securities and other fungible items. It comprises derivate markets, capital markets, currency markets, and money markets.

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References

Cepêda, Catarina, and Albertina Monteiro. “The accountant’s perception of the usefulness of financial information in decision making – A study in Portugal”. Review of business management, vol 22, no. 2, 2020, pp. 363-380. FECAP Fundacao Escola De Comercio Alvares. Web.

Maritan, Catherine A., and Gwendolyn K. Lee. “Resource allocation and strategy”. Journal of management, vol 43, no. 8, 2017, pp. 2411-2420. SAGE Publications. Web.

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