Distance and heading; two of the most important items necessary when taking flight, regardless of aircraft type. This allows the pilot to know what direction, and how far away he or she is travelling. The same rules apply in business. If the business model, or plan, is not clear and concise, the potential for becoming lost or worse becomes real. The following will discuss the differences between financial and economic factors and running a business. Additionally, how these factors affect business strategies, and how each inform making business decisions, concluding with an example from Motorola. Financial Factors vs Economic Factors
Businesses measure success in terms of financial factors. Finances are a key factor of accomplishment, which include positive cash flow, a controllable debt load, and an effort toward efficiency in maintaining variable costs down, amid others (Diffen, 2015). Financial success indicators differ from one business to another. It is important to measure the financial stability of a business and important decisions needed to make after the purchase. Managing inventory, purchase orders from suppliers, point of sale processes, and sales forecasts, all need to work for a business to effectively supply and serve consumers with what approached the business in the first place. Financial factors are not the only ones needed to run a business successfully.
Proper understanding of economic factors is important as well. Economic factors frequently influencing the function of a business consist of employment, consumer confidence, inflation, and interest rates (Diffen, 2015). There are a number of differences between financial and economic factors. Economics assist in explaining the factors involved in the insufficiency or excess of merchandise and services, which influence and used in every business (Diffen, 2015). Finances mainly consist of saving and lending funds, keeping in mind the time obtainable, cash on hand, and any threats involved (Diffen, 2015). Finances therefore reflect as a slight subsection, or a counterpart, of economics. Business Strategy
Making a profit is primary to keep a business moving forward. Listening to the consumer is another important element, to help determine change. Financial and economic factors both play a part in affecting business strategy. Financial factors include asset management, free cash flow, capital structure, and profitability ratios (Kono & Barnes, 2010). Additional factors include tax optimization, growth indices, and risk assessment and management (Kono & Barnes, 2010). Each abovementioned factor although different, adds a synergistic effect to the overall strategy developed for the business.
Economic factors resemble closely those associated with the financial factors. A couple economic factors include responding to demand, taxation, and, “A reliable monetary policy has the most benevolent impact on the operation of the businesses” (Kadocsa & Francsovics, 2011, p. 39). Businesses need to respond to the demand of the consumer to help propel forward momentum and continue to innovate and keep the product or service the company is involved. In addition to consumer response, taxation includes a potential higher tax on a product or service in the hopes this tax will deter consumers to utilize an alternate product or service to help create a cleaner environment. For example, a higher fuel tax to encourage participation in public transit, opposed to single driver vehicles (Business Case Studies, 2015).
The Business Decision
Financial relates to revenues and costs that affect the company’s overall profitability. Management’s decision-making process is first identifying the problem and assigning responsibility. Determining and evaluating possible courses of action, make a decision and finally, reviewing the results of the decision (Kimmel, Weygandt, & Kieso, 2011). One of the worst business decisions ever made by a business ever made by a business is when General Motors decided to continue to manufacturer large vehicles when the trend was smaller cars. This poor judgment leads to GM’s bankruptcy in 2009.
In the case of Motorola, management missed tectonic shifts in their industries until it was too late. Motorola held on to its old cellphone business too long, failing to leverage its Razr brand or couple it with a smartphone until the brand had lost its relevance (The Worst Business Decisions of All Time, 2012). At the close of business each day, management evaluates the profits and loss and determines what the next day should or should not entail. Different factors can often enhance the business, mainly financial and economic factors. Developing a strong and effectively business strategy and accepting how economic and financial factors can affect that strategy is paramount. Once an understanding and strategy is established, making a definitive business decision on how to operate from the decision is the next and possible final step in the process.
Business Case Studies. (2015). Retrieved from http://businesscasestudies.co.uk/first-group/managing-external-influences/political-and-economic-factors.html#axzz3RwWTd3hD Diffen. (2015). Economics vs Finance. Retrieved from http:/www.diffen.com/difference/Economics_vs_Finance# Kadocsa, G., & Francsovics, A. (2011). Macro and Micro Economic Factors of Small Enterprise Competitiveness . Acta Polytechnica Hungarica , 8(1), 23-40. Retrieved from http://www.uni-obuda.hu/journal/Kadocsa_Francsovics_27.pdf Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2011). Accounting: Tools for business decision making (4th ed.). NJ: John Wiley & Sons Kono, P., & Barnes, B. (2010). The Role of Finance in the Strategic-Planning and Decision-Making Process. Graziadio Business Review, 13(1), . Retrieved from http://gbr.pepperdine.edu/2010/08/the-role-of-finance-in-the-strategic-planning-and-decision-making-process/ The Worst Business Decisions of All Time (2012). Retieved from http://247wallst.com/special-report/2012/10/17/the-worst-business-decisions-of-all-time/