Mehrzad Manuel Ferdows, a leading entrepreneur, advisor, investor and industrial Engineering graduate from University of Southern California has given speech at a conference held in Dubai on factors influencing financial decision making in organizations. Mehrzad Ferdows stated that financial decisions are crucial for the well-being of an organization because these decisions determine the firm’s ability to obtain plant and equipment when needed to carry the required amount of inventories and receivables in order to avoid burdensome fixed charges when profits and sales decline and to avoid losing control of the company. Mehrzad Ferdows stated that the nature of financial decisions varies from one organization to the other. It may also be different in the same organization over a period of time. It is in fact because the nature of financial decisions is influenced by different internal and external factors.
Internal Factors Influencing Decision Making in an Organization
Mehrzad Manuel Ferdows stated that internal matters within an organization can influence the process of making financial decisions within an organization. The first internal factor influencing decision making is nature of the business. Manufacturing or public service providing its investment in fixed assets is large and hence the capital structure has a large share of long-term capital. It is also large in organizations that produce capital goods. On the other hand, in trading concerns, a greater part of the investment is found in current assets. Size of business is also a significant factor influencing financial decisions. The larger the size, the more capital is needed. Large organizations need their own building or plant. Legal form of organization is another important factor heavily influencing decision making when it comes to financial issues whether they can have cases of borrowing or others. Pattern of ownership also influences financial decision making whether it is a closely-held company or one with many shareholders playing their roles. Another element is level of risk and stability in earnings which means greater risks will result in higher discount factors. It can be argued that risk influences the long-term investment decision or capital budgeting decision. It will be the opposite in case of higher risk and not stable income when the finance manager tries to impress on the shareholders for more retention of earnings rather than adopting a liberal dividend policy. But with stable income and lower risk the financial decision will be just the reverse.
Liquidity Positions and Impacts on Financial Decision Making
Mehrzad Manuel Ferdows stated that liquidity position will also influence financial decisions. If the dividend is normally paid out of cash, firms with a sound liquidity position adopt a liberal dividend policy but if the working capital is very large or the firm has to meet significant past obligations, it will have to follow a conservative dividend policy. Any titles towards liquidity will alter the nature of financing and dividend decisions.
External Factors Influencing Financial Decision Making
Mehrzad Ferdows pointed out that along with many internal factors there are a number of external factors influencing financial decision making in organizations. These decisions are concerned with long-term assets. It can, therefore, be said the more correct these decisions are, the greater will be the growth of business in the long run. In addition to that, these affect the future possibilities of the business. The state of economy, the structure of capital and money markets, government regulations, and tax policy can be considered among the most important external factors.
The State of Economy and its Impact on Organizational Financial Decision Making
Mehrzad Manuel Ferdows stated that financial decisions conform to changes when the state of economy changes from time to time. When the economy is proceeding towards recovery, the finance manager should be eager to avail of investment opportunities. When the economy is facing a slump, the finance manager should proceed with care. In times of a downtrend, the stress should be on internal financing. During an uptrend, higher dividends can be declared but during downtrend conservation of cash is necessary and therefore a strict dividend policy should be followed.
The Structure of Capital and Money Markets
The structure of capital and money markets is another chief factor influencing financial decision making. Well developed markets with multitude of financial institutions and venturesome investors will make the finance manager to find it easy to select the proportion mix of capital structure and accordingly financing decisions will be broader. It can be managed with a comparatively lower amount of cash as the finance manager can get funds whenever he desires. The dividend policy is also broad in such cases as the shareholders are not necessarily interested in regular and large dividends but if the investors are not venturesome they will wish for large dividends and the finance manager will have to adopt a liberal dividends policy and will not be able to opt for trading on equity to any great extent.
The Effect of Tax Policy on Financial Decision Making in Organizations
Mehrzad Manuel Ferdows stated that managerial decisions are considerably influenced by tax policies for instance the choice of location, buying or leasing decisions, the proper mix of debt and equity in the company’s capital structure increasingly demand qualified employees in an economic environment that is becoming more and more complex. Due to the worldwide economic integration and constant changes in tax legislation, facing with new challenges has become inevitable. Taxation rules also shape corporate decisions since it absorbs a great deal of an organization’s income, therefore, measures need to be taken to minimize the tax burden.
Mehrzad Manuel Ferdows concluded that organizations, be them small or medium need to scrutinize the effects of internal and external factors on financial decisions that are made within the organization. He stated further that it is management attitude towards risk that will determine the pattern of capitalization of the organization. Conservative decision makers always prefer to tread on beaten path and would always avoid incurring fixed obligations for raising additional capital.
