Analyze the Basics of Financial Principles
You are the chief financial officer (CFO) for an organization and need to discuss with fellow C-suite executives that cost cutting is not the only answer to profitability. Prepare for the next manager’s meeting by responding to the following prompts:
Explain how a capital budget and a return on investment contribute to sustainable growth.
Clarify the role that risk analysis plays during capital investment decision making.
Provide 1 reference that discusses cost containment and patient care.
Analysis of Basics of Financial Principles
Sustainable growth is one of the primary objectives of any business. Sustainable growth refers to the maximum growth rate achievable through effective cash flow utilization without increases in leverage or debt (Al Breiki & Nobanee, 2019). Capital budget and investment return play a significant role in achieving sustainable growth. A capital budget is a valuable tool that provides information to businesses or investors regarding the potential investment project’s capital receipts and capital expenditure. The investors use this information to evaluate and measure the potential projects’ value throughout their life cycle (Al Breiki & Nobanee, 2019). On the other hand, return to investment refers is a performance measure applied to examine the efficiency or profitability of an investment. It is calculated by dividing an investment’s net profit (loss) by its initial cost.
Capital budgeting contributes to sustainable growth in various ways. First, capital budgets provide businesses and investors with crucial information regarding the value of resources required to run a project and their benefits, allowing businesses and investors to assess and rank the value of the projects or investments and decide the projects or investment options suitable for investing in (Al Breiki & Nobanee, 2019). Secondly, after the project begins, capital budgeting can be used to evaluate the project’s progress and the effectiveness of investment decisions. For instance, investors can use capital budgeting methods, such as the average rate of return (ARR), to evaluate the effectiveness of running projects. This method measures the profitability of a possible investment by considering its overall earnings. Thirdly, capital budgeting helps investors control expenditures in their projects. Lack of effective expenditure control in project investments can undermine their effectiveness (Al Breiki & Nobanee, 2019). Therefore, the expenses need to be controlled and monitored carefully to ensure the project becomes a success. Capital budgeting helps achieve effective expenditure control since it facilitates the assessment of the prospective project’s lifetime outflows and allows investors to keep the costs within the expected range.
Return on investment (ROI) also contributes to sustainable growth. It is a performance measure applied to examine the efficiency or profitability of an investment. It is calculated by dividing an investment’s net profit (loss) by its initial cost. It helps promote sustainable growth by allowing a company to determine the profitability of various projects and compare them to decide the most suitable project to invest in. Investment in profitable projects helps improve the overall performance of the organization (Egbe, 2018). Secondly, return on investment is considered a most critical measure of performance of an investment, focusing on other performance aspects of a project, including cost management, effective asset utilization, marketing, and promotional strategy. Therefore, a better ROI means that the investment has satisfied the other aspects of performance. Consequently, for a business to achieve sustainable growth, it needs to achieve the highest ROI in its projects (Egbe, 2018).
Risk analysis plays a significant role during capital investment decision-making. First, it allows businesses to identify and evaluate the significance of the potential risks that could negatively impact the performance of capital investments. This helps investors determine whether to move forward with the project or do away with it (Nagendra & Sharan, 2018). Secondly, through risk analysis, businesses or investors can anticipate the harmful effects of various adverse events on the potential investments and identify effective strategies to control them and the risk tolerance capacity of the investor (Nagendra & Sharan, 2018). This enhances the effectiveness of the project. Thirdly, risk analysis helps businesses check whether investments plans match with the investor’s financial goals (Nagendra & Sharan, 2018).
In summary, capital budgets play a significant role in achieving sustainable growth. It provides vital information on the total amount required to run a project, control its costs, and evaluate its profitability. ROI is also crucial for sustainable growth. It helps determine whether a project satisfies various performance indicators, including cost management, effective asset utilization, marketing, and promotional strategy. Besides, risk analysis informs the investors about the potential risks and their impacts on a project.
Al Breiki, M., & Nobanee, H. (2019). The role of financial management in promoting sustainable business practices and development. Available at SSRN 3472404. https://www.researchgate.net/profile/Haitham-Nobanee/publication/336910755_\
Egbe, S. (2018). Cost Reduction and Return on Investment of Local Manufacturing Firms in Rivers State. http://newworldjournals.com/media/pdf/admin_panels/cost-reduction-and-return-on-investment-o.pdf
Nagendra, A., & Sharan, A. (2018). Risk Analysis for Project Management. Journal of Applied Management-Jidnyasa, 9(2), 22-31. http://ischolar.info/index.php/JIDNYASA/article/viewFile/171693/159143