Financial decision-making for small businesses

Posted by SkillMaker in Mar, 2018

Financial decision-making for small businesses

Financial decision-making for small businesses involves making decisions that will shape the financial fortunes of the business and maximise returns for the business owner(s) (who may include shareholders). Decisions revolve around two key considerations: how and when to borrow money and how and when to spend it.

Financial decision-making is based on financial information available about the business’s performance. It draws on analyses of estimates, investment options and a number of financial documents that include cash flow statements, balance sheets and profit and loss statements.

Financial decisions focus on what is the best course of action for the business (in the short and longer term), while taking account of current financial and economic realities. Important considerations include balancing the need to grow in the longer term (through astute and careful investments, mindful of potential risks involved) while retaining sufficient cash to remain solvent in the short and immediate term.

When making financial decisions, financing, equity (how much of the business is owned and by whom) and expected returns are aspects that are usually considered.

Financing involves deciding where needed funds would come from:

– from the business’s own funds (e.g. funds owned by the owner)

– from selling equity, as happens when a company becomes a public company whereby stocks are sold to the public (shareholders) to bring in money

– increasing debt through such measures as bank loans

Expected returns refer to the potential yield — predicted as a result of the action being decided. Most businesses would be unlikely to make a high-risk decision if the predicted yield is low; however, they may consider taking a risk if the potential yield is high.

Financial decisions are made constantly during a business’s operations, from start-up onwards. Decisions might include whether to expand significantly or not (which may require significant additional funding), whether to invest in new or different business operations or products, or whether or not to incorporate.

Additional resources

To find out more about financial decision making, view:

https://www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-field-and-goals-of-financial-management-1/introducing-finance-22/types-of-financial-decisions-investment-and-financing-145-3871/