Business Decision-Making Essay: Financial and Non-Financial Factors

This essay provides a detailed analysis of business decision-making processes, focusing on the application of Net Present Value (NPV) and payback period techniques in evaluating investment proposals. The essay uses a case study of a software company, ABC plc, to compare two potential projects. It calculates the NPV and payback periods for each project, interpreting the results to determine the more viable investment. Furthermore, the essay explores the importance of both financial factors, such as financial statements and budget reports, and non-financial factors, including employee motivation and government policies, in making sound business decisions. The conclusion emphasizes the necessity of a comprehensive approach that considers both quantitative and qualitative elements for effective decision-making within an organization.

BUSINESS DECISION-
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK ..............................................................................................................................................1
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Business decision making is referred as course of action that are chosen primarily from
the set of alternatives for achieving the managerial or organisational goals or objectives.
Decision making is a continuous and a indispensable component for managing organisation and
its business activities. The present report will provide an understanding about how NPV and
payback period helps in decision-making. Further the financial and non financial data is also
addressed in the report.
TASK
Success of company is defined by the effectiveness of business decision-making process.
Organisations have a notional trend that decisions of only senior executives are considered and
that the decisions can be made only by them. Decision-making helps managers and business
professionals in solving the problems by examining alternatives and deciding the best and most
beneficial route (Wooldridge, and Cowden, 2020). Organisations follow a step-by-step
approach that is an efficient way of making informed and thoughtful decisions having the impact
over short term and long term objectives of company.
ABC plc a software company is planning to invest in new business. Company is available
with two proposals to invest. The financial decisions will be taken using the capital budgeting
techniques. It will enable the company to choose the best project.
Net Present Value – It is an tool used by the experts for checking the viability of project or
investments. Project is considered when the value left with the company after deducting cost of
investment from discounted cash flows is positive (Weber, 2019).
Payback period – The technique provides the managers the time period within which the cost of
investment will be recovered. Shorter the period more beneficial for the company as it will start
earning profits after recovering its cost.
PROJECT 1
Net Present Value of Project 1
Computation of NPV
Year Cash inflows
PV factor @
12% Discounted cash inflows
1

1 8000 0.893 7142.8571428572
2 12000 0.797 9566
3 16000 0.712 11388
4 20000 0.636 12710
5 30000 0.567 17023
Total discounted
cash inflow 57831
Initial investment 40000
NPV (Total
discounted cash
inflows - initial
investment) £17831
Payback period of project 1
Computation of Payback period
Year Cash inflows Cumulative cash inflows
1 8000 8000
2 12000 20000
3 16000 36000
4 20000 56000
5 30000 86000
Initial
investment 40000
Payback
period 2
1.7
Payback
period 3 year and 7 months
PROJECT 2
Net present value of Project 2
Computation of NPV
2

Year Cash inflows
PV factor @
12%
Discounted
cash inflows
1 10000 0.893
8928.57142857
14
2 20000 0.797 15944
3 25000 0.712 17795
4 30000 0.636 19066
5 40000 0.567 22697
Total discounted
cash inflow 84430
Initial investment 60000
NPV (Total
discounted cash
inflows - initial
investment) £24430
Payback period of project 2
Computation of Payback period
Year Cash inflows
Cumulative cash
inflows
1 10000 10000
2 20000 30000
3 25000 55000
4 30000 85000
5 40000 125000
Initial investment 150000
Payback period 2
1.5
Payback period 3 year and 5 months
3

Interpretation
NPV Payback Period
Project 1 £17831 3 years & 7 months
Project 2 £24430 3 years & 5 months
The above analysis of both projects shows that project 2 is more preferable in comparison
to project 1. Study gives NPV of £17831 for project 1 and a payback period of 3 years and 7
months. No doubt the project is viable and can be adopted by the company as it will drive profits
to the company. Company should adopt this project when it is not available with any other
option. But when company is available with an other option, the feasibility of other project
should also be checked. Ultimate goal of business is to make effective utilisation of the
resources. Project 2 gives NPV of £ 24430 with a payback period of 3 years and 5 months. The
outcome shows that project 2 will be more beneficial. Project with higher NPV are more
profitable and the payback period is also shorter than project 1. Company will start making
profits after reaching the break even point earlier in this project even when the cost of investment
is higher. Cost of project 2 is higher than 1 but it can be seen that cash flows are higher that will
enable company to generate profits more earlier after covering the cost. After the above study it
could be suggested that company should adopt project 2 for business expansion.
Financial and Non financial factors in decision-making.
Financial factors
Financial factors refers to the quantitative information related to the financial figures that
play and important part in decision-making. Company cannot make decision without adopting
the financial factors influencing the decision-making process. The financial statements are major
the major information provider on which decisions in company are based. These statements
include income statement, that tells about the profitability of company. The efficiency of
company in managing its operations is judged by its income statements by the profits reflected.
Balance sheet is financial statements representing the financial position of company. It represents
the assets and liabilities of company (Skyrius, 2018). Cash flow statements show whether
company is available with sufficient funds for making investments and meeting the working
capital requirements of company. Other financial factors used in decision-making are budget
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reports, cost reports and others. These are used by management to make decision making
process to make more accurate and effective decision.
Non Financial factors
Non financial factors are those that can affect the decision making process. These factors
have equal importance in the decision making. It includes effects of motivation, effective
communication, efficiency of employees for given targets and tasks, government policies and
procedures (Bals, Kirchoff and Foerstl, 2016). Companies are require to take these factors into
consideration as it can badly affect the achievement of goals and objectives of company.
CONCLUSION
Above study shows that business decision making process should be straight and clear. It
plays great importance in growth and success of company. Company has to consider both
financial and non financial factors in making the decisions. Financial decisions are taken after
applying different tools and techniques which gives them the base for making decisions.
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REFERENCES
Books and Journals
Wooldridge, B. and Cowden, B., 2020. Strategic Decision-Making in Business. In Oxford
Research Encyclopedia of Business and Management.
Weber, J., 2019. Understanding the millennials’ integrated ethical decision-making process:
Assessing the relationship between personal values and cognitive moral
reasoning. Business & Society. 58(8). pp.1671-1706.
Skyrius, R., 2018. Business Decision Making. In 2001 Informing Science Conference (Vol. 1).
Bals, L., Kirchoff, J.F. and Foerstl, K., 2016. Exploring the reshoring and insourcing decision
making process: toward an agenda for future research. Operations Management
Research. 9(3-4), pp.102-116.
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