12 Internal and External Factors Influencing Financial Decision

12 Internal and External Factors Influencing Financial Decision

Financial managers make financial decisions in light of investment, financing, dividend, and liquidity decisions. Various factors affect the objective of the firm.

What are the 8 Internal Factors Influencing Financial Decisions?

Internal factors are those matters of a firm that influences the financial decisions of that firm. On these factors, the firm has control. Internal factors are discussed below:

Nature of business

Nature of business effects on financial decisions. The firm can retain funds or pay dividends to the shareholders depending on the nature of the business.

Size of business

The size of a business affects the financial decisions. Large business firms invest more money to acquire fixed assets due to it’s huge capital fund. However, small firms cannot do the same.

Condition of Assets

The condition of assets is an important element in receiving finance from lenders. Therefore, the firm should keep both short and long-term assets to enjoy financing from suitable sources.

Life of the business

Investors keep faith in the running firm rather than a newly formed firm. So, a possible investor invested funds in the old business firm.

Business Cycle

The business cycle is the life cycle of a business. Different stages of the business cycle reflect differently, and decisions according to the stage.

The business’s legal entity is another element that affects the financial decision. Only public limited companies can finance from the stock market.

Management

The aggressive or conservative management strategy is another important factor that affects financial decisions.

Loan Contract

The loan from the lender or financial market and paying its interest is another influencing factor in financial decisions.

What Are The 4 External Factors Influencing Financial Decisions?

External factors are those external matters of a firm that influences the financial decision. On those factors, the firm cannot control it. External factors are discussed below:

Tax System

The tax system affects investment and financial decisions. The tax incentive, tax exemption, tax holiday, and easy tax submission system encourage investment.

Financial market

An efficient money market and capital market can influence financial decisions.

Political condition

Government stability and political situation influence a firm’s financial decisions.

Economic condition

Economic stability, inflation, export-import, the balance of trade, the balance of payment, and remittance are significant external factors that influence financial decisions. Other factors, like strategic policy decisions, are directed under management control.

These included the choice of products or services offered by marketing and production systems, investment, financing, dividend policies, and employee practices. 

Firms cannot do much to affect the external environment.

Still, their strategic and policy decisions can significantly impact many factors that largely determine the magnitude, timing, and risk of the firms’ expected cash flows. Management actions do have a significant impact on the firm’s wealth and common stock price.

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