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Financial and Non-Financial Factors in Decision Making

A few important aspects of sound financial and non-financial decision-making involve problem-solving, critical thinking, and a comprehension etc.

Team Desklib

2022-11-29

Introduction of Financial and Non-Financial Factors

Financial knowledge and decision-making abilities go hand in hand and are crucial for people to make wise financial decisions. A few important aspects of sound financial and non-financial decision-making involve problem-solving, critical thinking, and a comprehension of fundamental financial facts and concepts.

When making decisions about when and how to save and spend money, compare prices before making a large purchase, or plan for retirement or other long-term objectives, people with sound financial knowledge and decision-making skills can weigh their options and make the best choices for their financial situations.

When deciding whether to produce or buy, there are numerous considerations to take into account. Frequently, the focus is on expenses, comparing costs associated with manufacturing, labor, storage, and waste disposal on the "make" side with the purchase price, sales tax, shipping, and ordering charges on the "buy" side.

Few organizations are entirely aware of the "real" cost, especially for the make component, due to the fact that these cost implications are frequently complicated and nuanced. Due to the intricacy, organizations frequently do manufacture vs. buy study in an effort to reduce costs while omitting important factors that they would wish to take into account.

4 Financial Factors in Decision-Making -

The choice to revalue fixed assets is positively impacted by leverage.
Decisions on revaluing fixed assets are adversely impacted by liquidity.
Decisions about fixed asset revaluation are positively correlated with fixed asset intensity.
Effect of managerial ownership on the value of fixed assets

When selecting when, where, and how a firm will generate money, making financial judgments is crucial. When the market value of an organization's share increases, it serves as a representation of the firm's development and a means of boosting investors' wealth -

The choice to revalue fixed assets is positively impacted by leverage.

A measure of liquidity is the ability of a corporation to finance current liabilities and debt that has matured using current assets. Low liquidity ratios point to possible issues that can mean the company is on the verge of defaulting on its debt.

According to the positive accounting theory of the hypothesis of debt relief costs, businesses that are at risk of defaulting on debt agreements, such as those with low liquidity values, will look for accounting methods that could shield them from credit risk resulting from the default so that they will be motivated to perform fixed asset revaluation.

The goal of the revaluation is to reveal the fixed asset's genuine value in order to tell the creditor about the guarantee that the asset will be sold if the business is unable to pay off the maturing company's debts.

Decisions on revaluing fixed assets are adversely impacted by liquidity.

Because they can be utilized as collateral in the event that the business is unable to pay the debt, fixed assets are one of the creditors' main worries. Companies will find it simpler to get loans from creditors due to the high value of fixed assets.

According to positive accounting theory, businesses with a high fixed asset intensity would attempt to select a strategy that will be advantageous to the business, one of which may be revaluation. If the company is liquidated, the asset could be sold to the creditor as an additional asset due to the asset's increased worth as a result of the revaluation.

The share of low fixed assets is not related to the cost to be issued by the company if it revalues because the revaluation also involves significant expenditures. According to this concept, businesses with large fixed assets will revalue more frequently than businesses with low fixed assets.

Decisions about fixed asset revaluation are positively correlated with fixed asset intensity.

Companies are categorized into three sizes: small, medium, and giant. Small businesses will be harder to see than large businesses. Large businesses are susceptible to stakeholder demands that could raise their political costs, including greater taxes. Because of this, managers of huge corporations are more prone to use conservative accounting practices to draw less political attention to their organization.

According to the positive accounting theory of the political costs hypothesis, large corporations tend to select strategies that can shield them from high political costs. Asset revaluation can raise the value of assets, which is subsequently utilized as the foundation for determining the company's depreciation expense.

The cost of automatic depreciation will increase and lower the company's profit. Reduced profits will also reduce the business's political expenses (taxes).

Effect of managerial ownership on the value of fixed assets

The outcome of logistic regression demonstrates that managerial ownership has an impact on judgments about the revaluation of fixed assets. In agency theory, managerial ownership plays a crucial role in minimizing the conflict of interest between agents and principals. The agency costs incurred by the business might be decreased by managerial ownership.

Since management is a component of the principle itself, it will also behave in accordance with the principal's wishes. Management will take measures that are advantageous to all parties, both from a management and stakeholder perspective. Revaluation of fixed assets was done by one of them in cooperation with management.

The principal will gain some advantages as a result of management decisions to revalue, including the ability to raise the creditor trust, lower corporate income tax, and boost share value. Revaluing assets could result in a greater ownership stake because the extra value can be distributed as bonus shares to non-taxable owners.

3 Non-financial Factors in Decision-Making

Threats and legislation in the future
Complying with Industry Standards
Agenda and reputation of ESG (Environmental, Social and Governance)

It's critical to not ignore the non-financial aspects that can significantly influence your company's decision. Non-financial variables can be significant even though the financial argument for an investment is a crucial component of the decision-making process -

Threats and legislation in the future

There will be a certain amount of regulation to take into account, which may have an impact on your make or purchase decision depending on the industry you are in and the items you are supplying.

The key is to consider any existing or upcoming legislation. When you manufacture internally, you will have more control and be able to establish your own manufacturing standards. When you outsource, the responsibility for adhering to regulations, as well as any additional testing, paperwork, etc., falls primarily on the shoulders of the third-party manufacturer.

It's critical to think about whether you or your manufacturer can guard against any relevant concerns, such as cyber security assaults and the protection of intellectual property, in addition to making sure that you comply with the law. If you decide to produce internally, all of these factors will increase the time and resources needed. They will also have an impact on any third-party manufacturers you hire because you will need to choose the one you can rely on to protect your manufacturing process.

Complying with Industry Standards

You must make sure that your products not only adhere to legal requirements but also to industry standards in order to maintain your position as a market leader. Additionally, this might increase local employment and raise the profile of your business in the area.

If you're considering changing the way your company now manufactures its products, you must be sure that the new arrangement will either preserve or raise existing standards. While in-house teams may feel more personally responsible to your end consumers and more driven to create high-quality products than third-party manufacturers, the latter are more likely to have significant knowledge and rigorous testing procedures when it comes to your items.

Agenda and reputation of ESG(Environmental, Social and Governance)

You must take into account how your choice will affect ESG elements, which in turn will affect the relationships you already have with suppliers and consumers as well as your overall reputation.

Depending on how your brand positions itself, the decision to change the manufacturing process could have an impact on how your customers see you. Your brand's ethos and all of your business goals, including environmental goals in addition to financial goals, should be reflected in the manufacturing choices you choose.

For instance, using in-house manufacturing could assist a brand image that emphasizes environmental responsibility, especially when using regional suppliers. Additionally, this might increase local employment and raise the profile of your business in the area.

However, abruptly abandoning small manufacturers and suppliers who depend on your company could reflect poorly and make future suppliers hesitant to engage with you.

Conclusion-

Based on much research, managerial ownership and government ownership have been shown to positively influence fixed asset revaluation decisions. Nonfinancial factors also play a role in determining fixed asset revaluation decisions. Leverage, liquidity, the number of fixed assets a company has, firm size, firm worth, and an independent board of commissioners have no bearing on a company's decision to revalue its fixed assets.

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