Factors Affecting Business Decision Making

This essay discusses the various factors that influence business decision making, including financial and non-financial factors. It explores the importance of considering cost, risk, liquidity, profitability, management team, market growth potential, and customer retention. The essay also provides an example of evaluating investment proposals using net present value and payback period. Overall, it emphasizes the significance of making informed decisions for business success.

Business decision making

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
Evaluating the feasibility of investment proposals for A&B plc...........................................3
Different factor considers at the time of making financial decision......................................6
CONCLUSION..........................................................................................................................7
REFERENCES...........................................................................................................................8

INTRODUCTION
The decision making process is an integral part of every business organization which
provides support in effective management of the business. Through effective decisions only,
the business can be run smoothly along with achieving the desired aims and objectives. This
essays states about the different investment appraisal technique that can be utilized by the
company A&B plc in taking decisions along various factors affecting the decision making
process.
Evaluating the feasibility of investment proposals for A&B plc
In this, there are two projects from which one is required to be accepted and in order to know
that NPV and the payback period of both the projects is being evaluated and given below.
Net present value
NPV can be considered as the estimation of the anticipated incomes which is
determined by the changing over the future incomes to the current worth (Willigers, Jones
and Bratvold, 2017). This strategy is helpful in deciding the productivity related with the task
or the investment plan.
Project A
Computation of NPV
Year
Cash
inflows
PV factor
@ 14%
Discounte
d cash
inflows
1 30000 0.877 26315.8
2 35000 0.769 26931
3 40000 0.675 26999
4 60000 0.592 35525
5 90000 0.519 46743
Total discounted cash
inflow 162514
Initial investment 120000

NPV (Total discounted
cash inflows - initial
investment) 42514
Project B
Computation of NPV
Year
Cash
inflows
PV factor
@ 14%
Discounte
d cash
inflows
1 40000 0.877 35087.7
2 45000 0.769 34626
3 50000 0.675 33749
4 75000 0.592 44406
5 80000 0.519 41549
Total discounted cash
inflow 189418
Initial investment 150000
NPV (Total discounted
cash inflows - initial
investment) 39418
After analysing the above stated projects, it can be stated that the A&B plc can make
an investment into both the projects since the NPV of the projects is positive. But the
management is required to undertake only one project therefore, it should go for project A as
the amount of NPV is greater in this project, which is, £42514 as compared to project B
which has NPV of £39418. It accounts for the time factor while assessing the future money
inflows. Alongside that the discounting rate can likewise be adjusted with regard to the risk

existing in the market. This did not depend on the supposition that the money inflows will be
reinvested at the IRR dissimilar to IRR.
In spite of these advantages, it has certain detriments also. For the undertakings
having the more long term time span, there are odds of getting the erroneous estimation of
things to future money inflows which may influence the decision of the manager.
Additionally, in the event that there is any blunder in deciding the discounting rate then it
might prompt to wrong estimation of money inflows settling on the choice wrong.
Payback period
It is the technique utilized by the organizations for assessing the venture in regard to
the time the speculation will take so as to recuperate the sum invested at first (Mohan and
Narwal, 2017). For figuring it all the more precisely, sum contributed is divided by the yearly
money inflow. This methodology overlooks the long-term gainfulness related with the
undertaking.
Project A
Computation of Payback period
Year
Total cash
flow
Cumulative cash
flow
0 -120000 -120000
1 30000 -90000
2 35000 -55000
3 40000 -15000
4 60000 45000
5 90000 135000
Payback
period 3.25 years
Project B
Computation of Payback period
Year
Total cash
flow
Cumulative cash
flow
0 -150000 -150000
1 40000 -110000
2 45000 -65000
3 50000 -15000
4 75000 60000
5 80000 140000
Payback 3.2 years

period
The payback period of both the projects is nearly same, which is 3.2 years.
Therefore, A&B plc should invest in project A since, the net present value of the project is
high along with the shorter payback period which is economically feasible for the company.
Different factor considers at the time of making financial decision
There are various factors having an influence over the business decision making. It
has been bifurcated into financial and non-financial decision making. A detailed description
is given below.
Financial factors:
Cost and risk involved: The cost involved in raising funds from different sources along with
the risk associated with each sources of the fund (Belás and et.al, 2018). The financial
manager is required to analyse and compare the risk with it cost.
Liquidity position: The amount of liquid assets being available with eth organization in order
to meet the uncertain future short term contingencies. Also, with consistent cash flow it can
use borrowed funds effectively (Dhochak and Sharma, 2016). It will provide result whether
company is having enough cash to run its day to day business operation.
Profitability: The net income being generated by the company is determining whether it is
showing an upward trend or fluctuating based on which the final decision is being made in
regard to funding or taking additional funds or whether it will be profitable in investing in the
company (Tulasombat, 2017).
Non-financial factors
Management team: For taking effective business decisions it is very important for the
organization to have an effective management team who can efficiently manage the business
(Akben-Selcuk, 2016). The employee of the company is having the required skills and
knowledge in the field business is going.
Market growth potential: This factor works on deciding whether the market in which the
company is willing to expand its business or is currently operating is having any future
growth potential or not (Almansour, Almansour and Almansour, 2019). This is very
important aspect based on which investment related decision is taken.

Customer retention problem: There are time when the half of the income of the company is
linked to just of its customer which makes it difficult for it to retain that customer
(Bakhshani, 2017). If the company is not able to retain that customer then it will have a
drastic impact over the business.
CONCLUSION
Thus, it can be concluded that for effective and right decision it becomes very
essential for the business entity to take into account different types of factor whether it is
monetary or non-monetary in nature. The company should invest in Project A (Dishwashing
project) because it is having higher NPV and lower PBP.

REFERENCES
Books and Journals
Akben-Selcuk, E., 2016. Factors affecting firm competitiveness: Evidence from an emerging
market. International Journal of Financial Studies. 4(2). p.9.
Almansour, B., Almansour, Y. and Almansour, A., 2019. Small and medium size enterprise:
Access the financial and non-financial factors. Management Science Letters. 9(5).
pp.687-694.
Bakhshani, S., 2017. The Relationship between Non-financial Factors, Capital Structure and
the Performance of the Listed Companies on the Stock Exchange. International
Journal of Economics and Financial Issues. 7(3). p.542.
Belás, J., and et.al, 2018. Important factors of financial risk in the SME segment. Journal of
International Studies.
Dhochak, M. and Sharma, A. K., 2016. Identification and prioritization of factors affecting
venture capitalists’ investment decision-making process. Journal of Small Business
and Enterprise Development.
Mohan, V. and Narwal, K. P., 2017. Capital budgeting practices: State of the art. Asian
Journal of Research in Banking and Finance. 7(4). pp.57-74.
Tulasombat, S., 2017. Financial Factors Affecting on Investment Decision of Organic
Agribusiness SMEs in Chiang Mai Province, Thailand. Journal of Modern
Management Science. 10(2). pp.132-141.
Willigers, B. J., Jones, B. and Bratvold, R. B., 2017. The net-present-value paradox:
Criticized by many, applied by all. SPE Economics & Management. 9(04). pp.90-
102.