o what extent do you believe non-financial factors contribute to the success of any investment decision a business makes
Businesses make a variety of decisions everyday ranging throughout each part of the firm, such as how much stock to order, to whether or not to employ extra staff. Decision making is an integral part of the everyday business world. Managers will be making decisions throughout their working day, and the types of decision will vary with the managers role and level of authority within the organisational structure. Managers and directors will when making a decision look at the pros and cons of such a decision.
In the case of investing into the firm, both quantative and qualative factors will be taken into account to decide whether or not the investment is viable for the firm. In making decisions regarding investment both financial and non-financial factors will be looked at to see if the investment is going to be a success or not. The investment should always be a successful one for the firm and because it would be unfavourable for the investment to be a failure it is important that they make the correct decision as to whether to invest or not.
During the decision making process it is important that if the decision could “make or break” the firm then both quantitive and qualitive factors are looked at. Financial factors will heavily influence the firm if its goal through investing is to increase profit, most firms aim to create profit (or surplus if a charity) as there would be no point investing and being in business if running at a loss.
In order to analyse the quantative factors a firm can use investment appraisal techniques in order to estimate the success of the investment such as the pay back method which estimates the time taken to recover costs from the investment and the average rate of return which gives an estimated percentage of how much extra revenue will be made after the costs of the investment. If it takes a long time for costs to be recovered or that there is a low percentage average rate of return, it may not be worth investing if intention is to actually to make profit.
In this case it may be more successful to leave the money to grow in the bank depending on interest rates at that time. The success of an investment could depend highly on finances. If for example the economy is in a recession within the business cycle. If this happens, the cost of the investment may have risen due to high inflation which is likely to reduce the demand for the firm’s goods, especially if they are in a market selling luxury goods rather than consumables that are inelastic to price charge.
If its goods have a high elasticity when there is a price charge then it is very likely that the sales will be affected by the business cycle easily. The firm’s investments could also become unsuccessful if they have used a loan to finance the investment and they become vulnerable to interest rates, or alternatively they cannot afford to repay as the firm does not have enough working capital due to lack of investment in man power or machinery they have become too costly to operate or even become damaged and there are high repair costs for it.
Most businesses working to make profits are likely not to want any increases in costs incurred on them. However, it must also be noted that there are non-financial factors that can influence the success of a business decision. If there is a lack of demand for the firm’s products and therefore is not successful (making profits) then this may not be due to the business cycle but actually the firm’s reputation and therefore corporate image.
If the firm has a very bad reputation and corporate image, for possibly pollution, bad customer service or over pricing goods then the customer base may not be there and would rather go to the competition. It is very easy for a firm to lose a good reputation but really difficult to gain one. The success of an investment could be determined by the amount of competition affecting the demand for the goods. If the investment is/has been in goods or equipment, then it may be a problem if there are bad relations with suppliers or maintenance contractors who are unreliable and this could affect the success.
Especially if it is in the construction of new premises and therefore this could delay progress. Some firms may make an investment at a loss in order to improve public relations and corporate image without immediately focussing on creating a financial gain. For example Walkers ‘Books for Schools’ and Tesco’s ‘Computers for Schools’ promotions which give away books and equipment for tokens collected and therefore are losing money from the investment.
The success of an investment could be affected by external issues such as opposition for investment into equipment or expansion of premises or construction due to environmental damage, pollution that could occur. Planning permission for an investment may be turned down. Trade Unions could create problems if investments were to result in heavy job losses. If industrial action occurs it could scupper any attempts of investment by not having the manpower available to operate any new machinery for example.
Once the investment has been made, it is up to the managers to ensure that it is successful or depending on the investment as it may not do as the firm intended. Firms may invest into the firm in order to improve staff relationships such as facilities possibly a new canteen, or they could also invest in the firm in order for staff motivation to be improved throughout the firm through training is not done correctly there could be wasted investment. Overall it must be noted that many, if not all, businesses invest into the firm in hope of creating profits.
The aim or function of a business is to make profit after survival. Therefore it would be correct to say that finance plays an important part in investment as without it they would not be able to invest. Businesses are likely to make a profit from their investment in the long term, and therefore one which only brings in a small amount of revenue is not going to be viable. The business cycle is going to affect an investment as will costs of investing and making it. However as already stated non-financial factors do influence the success of a business decision.
Such as investments made to increase the firms popularity over its rivals, such as a price cut in petrol and diesel, in order to look good against its competition. Strategies such as this could also improve its market share. A firm may have a community fund in which it donates to various local groups also increasing its prestige. If the firm has a poor image then it may be difficult to regain custom and recover costs but non-financially the attempt to improve its image may not work.
Stakeholders also pay a large role in the success of any investment decision, each having their own objectives. If stakeholders feel that they do not want the investment to go ahead, directors and managers may bow to pressure from shareholders. Internally, staff may oppose of investment that is not going to benefit them, possibly as it could create job losses and/or make their work more difficult. Whereas they could be for such investments that improve their working conditions and facilities. Externally the government/local authority may express opposition if it is not in local interest.
Trade unions would not appreciate any job losses either ethically then this may prevent due to high opposition the investment actually going through. So even though a combination of financial and non-financial factors will be analysed when making the investment decision there is clearly a focus on the firm’s finances and long-term aims. As all training investments, promotions etc. that serve to increase the firms corporate image even community and environmental projects all serve to help finance the firm financially long-term as it increases the firms popularity and therefore market share and revenue.
So even though the non-financial factors do serve the firm in making the successful decision on investment they do serve to help finance the firm in the long-term. If investments were made without a look at financial gain then the firm would not be successful or progress at all. Firms exist to make profit but in the investments decision process some non-financial factors must be looked at so that they can make it successful and that the opportunity cost is not the better option.