Finance Decision Making Theory - Analysis of Literature

This report analyzes various literatures on finance decision-making theory. It covers topics like cash flow analysis, financial decision-making in stock market, attitudes of business owners and managers towards financial decision-making, and disclosure of financial statements and its impact on decision making of investors in commercial banks.

Running head: FINANCE DECISION MAKING THEORY
Finance decision-making theory
Name of the university
Name of the student
Author Note

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion:................................................................................................................................5
References:.................................................................................................................................6

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Introduction:
The financial decision is considered as an essential decision taken by the financial
manager for doing financial-mix of an organization. This decision focuses on the borrowing
and allocation of funds, which are required for making the investment decision. To raise
funds, the financial decision of the company can take two ways, which are, debt and equity.
Equity includes company’s own money like share capital while debt refers borrowing funds
from the outside sources in the form of debenture, bond and loan. Hence, understanding of
various aspects regarding this financial decision-making is essential. At present, manager of a
business requires to know the process to navigate the financial information at time of making
decisions. Hence, the concept of financial decision-making leads a manager to know about
balance sheets, cash flow statements, income statements and financial disclosures for taking
and managing key decisions. This report has intended to analyze some literatures based on
this concept.
Discussion:
According to Lu and others, analyzing cash flows along with understanding of project
financing are essential for contractors to manage construction projects. The success of a
project is chiefly depended upon managing and forecasting of the cash outflows and cash
inflows. Most of the companies related to construction have failed due to inefficient liquidity
to support their daily activities instead of inadequate management of other resources.
Management of cash flow can be helpful during the low cash availability for which project
can be disrupted. Traditional methods regarding cash flow analysis depends upon the cost
information and manual integration of time. However, by applying five-dimensional building
information modeling (5D BIM), it can be possible to automate the manual integration
process. Other papers, based on 5D BIM, have focused on cash flow estimation instead of
cash inflow analysis and project financing. Hence, this selected paper has proposed a BIM-

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based methodology framework regarding cash flow analysis and project financing. The
discussed framework has considered retainage and contract types to estimate cash outflow
and cash inflow patterns for work force, equipment and materials for getting comparatively
accurate measure of cash flow. In addition to this, for evaluating project-financing scenarios,
this framework can be used as well. To authenticate the proposed framework, illustrative
examples have been shown through considering two scenarios. The final outcomes have
represented that the framework can assist contractors to analyze the cash flow and to make
accurate decisions for various design and payment scheme alternatives regarding this
construction project (Lu, Won & Cheng, 2016).
Calopa, on the other side, has discussed about attitudes of a business owner and a
manager towards financial decision-making along with strategic planning. This paper has
discussed the concept based on small and median sized companies (SMEs) in Croatia. Those
SMEs are considered as backbone of the Croatian economy and consequently those SMEs
should generate a wide range of management and financial knowledge for serving as a
competitive advantage in the decision-making process. This specified sector has contributed
economic development in this region through creating job opportunities, developing
innovative capabilities and reducing regional development gaps. Moreover, this paper has
tried to indentify style and entrepreneurial skills of managers and their level of financial
knowledge. The researcher has divided the entire discussion of this paper into three sections.
Firstly, the paper has conducted a literature review related to financial decision-making and
strategic planning related to SMEs. Second part of this paper has focused on the problems
regarding research agenda while the third part has concluded the entire discussion. This
report has collected primary data and has analyzed those with the help of standard tools of
descriptive statistics. For collecting data, this paper has collected 106 responses as sample
from various SMEs of Croatia. After conducting this statistical research, the researcher has

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found that business owners and managers are concerned about their financial outcomes
though it has not influenced the financial-decision making for all stages. Moreover, they can
influence financial decision of management, based on its four financial functions, which are,
planning, organizing, lending and controlling. In other outcome, the concerned researcher has
found that regarding the process relate to financial decision-making, business owners and
managers have used their most frequent ethical principles. The other finding has represented
a strong and positive impact on the process of financial decision-making on some selected
factors like intellectual capital, innovation, reward for the effort and speed of decision-
making (Klačmer Čalopa, 2017).
Yuniningsihl and others have conducted an analysis on decision-making based on the
stock market. The chief research objective of this paper is to analyze the magnitude of risks
that investors can take at the time of their investment based on the loss aversion, in terms of
the behavior of risk taking with relation to that. In the later part of the study, this loss
aversion has been used as the independent variable reviewing from the two sides regarding
the gain and loss domain. It has been observed that, when investors have remained in the
position of loss aversion within the gain domain, they have tried to adopt a comparatively
lower risk taking behavior than that regarding the loss domain. Hence, such behavioral
tendency of investors regarding differences in those two distinct domains has been described
in a hypothetical value function. For this, ANNOVA Test has been applied for measuring the
disparity between risk taking behaviors in the two domains towards the loss aversion. After
doing the hypothesis testing, it has been observed that in the loss aversion of the gain domain,
investors have a lower risk taking compare to that of loss aversion within the loss domain
(Yuniningsih, Widodo & Wajdi, 2017).
Saleh & Alghusain, (2018), have also conduct a research on disclosure of financial
statements and its corresponding impact on decision making of investor in commercial banks

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of Jordan. The banking sector has played a significant role in any country due to its impact on
economic condition of the nation either through economic and financial indicators or through
the different banking operations provided by the financial companies and annual financial
statements of banks. Those statements have been considered as a chief information resource
for a large number of economic sectors comprising the investors. On the contrary, disclosure
has played a vital role for addressing the problem of asymmetric information between
investors and managers for which, it has increased agency problem. Hence, the importance
related to data of the annual financial statements of companies and banks has been attributed
chiefly to its validity and reliability along with availability and clarity within a proper time.
Thus, any manipulation or error within the data has led to nonofficial decisions, which has
affected the interest of investors and their financial and economic projects. Thus, it is
essential for the monetary authority of the Central Bank and other control departments and
entities to have a strict control, which can ensure that the financial companies and banks have
enclosed their data in an appropriate way. To address attitudes of professionals like
managers, investors and analysts, a questionnaire has been formed. Moreover, with the help
of those questionnaires, researchers have intended to identify the degree financial information
for taking investment decisions. The outcome has revealed a fragile positive relationship
between investment decision and financial information, which commercial banks have
provided to the investors. Hence, this research work has recommended that sufficient care
and due attentiveness can be maintained for preparing financial statements for avoiding faulty
decisions of investment.
Conclusion:
Hence, the entire report has discussed about financial decision making of an
organization based on various articles. The first article has focused on the financial decision
making framework related to construction projects with the help of 5D Building Information

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Modeling (5D BIM). This project has stated that, knowing cash flows and project finance are
two very important concepts for a constructer at the time of managing construction projects.
If a construction company fails to take proper decisions regarding its liquidity support, then
the concerned company may fail to construct any project of it. Hence, the paper has provided
importance to measure cash flow instead of analyzing cash inflow for any project financing.
For this, 5D BIM methodology can be used. The second article of Calopa has been taken for
further analysis. This article has focused on the attitudes of business owners and managers
towards financial decision-making. For this, the author has chosen small and median sized
companies of Croatia, as those companies have played significant role to develop its
economic condition. Hence, the paper has tried to understand about the financial skills of
those managers regarding decision-making. The research has found that managers and
business owners of those SMEs are well-known about their jobs regarding this decision-
making. The third article has discussed about the financial decision-making in a stock market.
This paper has focused on the magnitude of investor’s risks that can arise at the time of
investment. Saleh and Alghusain, on the other side, have discussed about the financial
statements and its related impacts on investors regarding their decision-making in
commercial banks of Jordan. The paper has opined that proper care and attentions are
required to maintain financial decisions without any faulty decisions of investment.

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References:
Klačmer Čalopa, M. (2017). Business owner and manager’s attitudes towards financial
decision-making and strategic planning: Evidence from Croatian
SMEs. Management: journal of contemporary management issues, 22(1), 103-116.
Lichtenberg, P. A., Ocepek-Welikson, K., Ficker, L. J., Gross, E., Rahman-Filipiak, A., &
Teresi, J. A. (2018). Conceptual and empirical approaches to financial decision-
making by older adults: Results from a financial decision-making rating
scale. Clinical gerontologist, 41(1), 42-65.
Lu, Q., Won, J., & Cheng, J. C. (2016). A financial decision making framework for
construction projects based on 5D Building Information Modeling
(BIM). International Journal of Project Management, 34(1), 3-21.
Saleh, I., & Alghusain, N. (2018). Disclosure of Financial Statements and Its Effect on
Investor’s Decision Making in Jordanian Commercial Banks. International Journal of
Economics and Finance, 10(2), 20.
Yuniningsih, Y., Widodo, S., & Wajdi, M. B. N. (2017). An analysis of Decision Making in
the Stock Investment. Economic: Journal of Economic and Islamic Law, 8(2), 122-
128.