Financial Management in Small Business: Location Selection Report

This report examines the critical factors influencing small business location decisions, emphasizing financial management principles. It analyzes the importance of location, raw materials, market proximity, infrastructure, economic policies, and demographics. The report explores capital budgeting, including NPV and IRR, and their impact on short- and long-term operations. It details the capital budgeting process, techniques like payback period, accounting rate of return, internal rate of return, and profitability index. The report also discusses Reilly's Law of retail gravitation and its influence on trade areas, competition, and customer choice. The analysis compares two potential business acquisitions, Business A and Business B, using NPV and IRR to recommend the most financially sound investment. The findings suggest that Business A is the better choice due to its higher NPV and lower risk profile.

FINANCIAL MANAGEMENT IN SMALL
BUSINESS
There are certain factors that is helpful to choose a business.
Getting a good location aids the business to grow successfully.
The key factors are given below.
• The availability of the raw materials for the business. The
raw material can affect the profit margin of the company
(Southern, 2016).
• The market of the business should be near to its customers
so that the customers finds it convenient and easy to find
the product of the company (Dixit, Clouse, & Turken, 2019).

FINANCIAL MANAGEMENT IN SMALL BUSINESS
• Basic infrastructures and amenities like water supply, power supply
should be available in the locality of the business.
• The economic policy of the business should be in favour of the
business.
• The demographics of the location should be favourable to the
business.
• The distribution channel should be easier to access by the company.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
• The business can be placed in the center of the free trade zone
thereby increasing its accessibility and publicity.
• Small business should be placed in a secure and safe premises that
will increase its security.
• The less the competition, the better for the small business.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
• The business should be placed in a location where the skills of the
workers are best.
• The small business often runs with lower cash therefore it is essential
that it should be placed in a place where the business rates such as
rent, bills and taxes are comparatively lower than other locations (Lin
et.al., 2018).

FINANCIAL MANAGEMENT IN SMALL BUSINESS
• Small business should be placed in a location where there is a
potential for its expansion and growth.
• the size of the market in the chosen location should be properly
evaluated in the before starting the business in the location.
• The market growth potential can be observed by taking a survey of
the target market.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
Capital budgeting is a crucial matter that should be taken into
consideration before choosing the perfect business (Riahi-Belkaoui,
2016). Capital budgeting can impact on the short and long term
operation of the business. Following will aid to understand the long
and short term impact of capital budgeting in the location of the
business. NPV and IRR aids in evaluation of the small business.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
Impact
Capital budgeting aid the business to assess its financial risk related to
its operations. Capital budgeting aids the firm to estimate its capital
expenditure as well as evaluates the financial resources available to the
firm (Khan, 2019).

FINANCIAL MANAGEMENT IN SMALL BUSINESS
Objectives
• Capital budgeting process aids the firm to choose the most profitable
project for their firm from the projects. The organisation needs to
select the best project that will increase their shareholder’s wealth
(Ermasova, & Ebdon, 2019).
• Along with the primary objective, capital budgeting also helps the
firm to control their capital expenditure.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
• Capital budgeting also forecasts the requirement of capital
expenditure for the firm, ensuring no investment opportunities are
lost during the budget process (Ittner, Michels, 2017).
• Capital budgeting aids the firm to determine and balance their funds
and the sources. It also aids the firm by balancing the cost of
borrowing and investment of the firm.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
Process
• First step involves identifying different investment opportunities for
the project. Investment opportunities can help the business with
product expansion.
• Once the investment opportunities are identified, the organisation
evaluates their option for the investment.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
• After selecting the investment opportunities, the organisation
identifies and evaluates their proposals and select the most profitable
investment from it. The organisation uses methods like capital
rationing to rank the project as per their requirement.
• After the project is selected, the firm organises the funds needed for
the project. For this, they identifies various sources of funds and
allocates them accordingly.

FINANCIAL MANAGEMENT IN SMALL BUSINESS
• The last and final step after selecting the investment is to review
their investment. The firm compares the actual performance of the
chosen investment with the expected performance.