Management Decisions - Term Paper Example

? Management Decisions Management decisions in a business revolve around value maximization of the stockholders. This is entailed in value maximization theory of macroeconomics. This theory holds that, the interest of the stockholders should be safeguarded; however, this happens to stockholders who have an interest on the firm. Therefore, the right decisions made by the management in a firm, lead to maximization of value in a business or the firm. In addition, it also has a great contribution in the betterment of the economy in a country. When right decisions are made by the firm’s management to maximize value, this is also reflected in the increase of prices of the stock caused by efficiency of markets in the economy. On the other hand, increase of stock prices causes economic growth through investment and consumption channels. The finding of this essay shows the interrelationship between the increase in stock’s price and growth of the economy. This is enhanced through consumption and investment channels that exist in the product and financial market Management decisions Introduction Management in a firm entails board of directors who are entrusted by shareholders with responsibilities of running the business because they have the required expertise. Management should hire temporary workers and upgrade old machines in order to lower cost of input. Additionally, they should also ensure the optimal parts kept in the shelf have the capacity to sustain demand in the product market and give optimal profit. It is agreed in all business circles that a firm’s management should also look over shareholders’ interest. This is in an effort to maximize shareholders’ value by engaging in decisions that that facilitate rise of value and economic growth of the firm. In order to have an efficient financial and product market, stock prices should be addressed because it holds the present and future information of the firm. This implies that great performance of firm’s managements should be focused and reflected in price stock. Therefore, every decision made by the management should address stock prices of the firm in the financial market. This is in an effort to maximize profits thus reflecting to the growth of the economy. In addition, the management should embark on decisions that that lowers the cost of the input in a firm. This is in an effort to increase profit margin, which is achieved when cost of inputs is lower while stock prices increases. This paper work focuses on management decisions to regulate stock prices and input cost in order to enhance economic growth of the firm. Value maximization in a firm The corporate objective of managers in a firm is to safeguard the interest of all stakeholders, who includes customers, employees and the general public who are associated with the company. During decision-making, the management is faced with trade-offs which makes them unable to serve all the stakeholders at the same time. On the contrary, it is elaborate that when the management takes the right decision, there is maximization of stakeholders’ value. In addition to this, they also make a substantial contribution in the growth of the entire economy which causes the prosperity of all stakeholders (Hayes, 2001). Management decision of lowering the cost of inputs and raise the stock price has a greater influence in the economy. This is because it increases the profit margin which is the main objective of firms in the economy. According to macro economics the profit margin in a firm can be achieved through investment and consumption channels in the market. Change in stock prices affects patterns of consumption in the economy thus increasing shareholders wealth. This assumption is based on the life cycle theory, which states that individuals consume a constant percent of their present value and future income. This indicates that stock price and level of consumption have a direct relationship in the economy (Offenbacher, 2007). On the other hand, the relationship between investment and stock prices is explained through Tobin’s ratio theory. The theory states that management in a firm can decide to employ higher capital assets if the ratio between market value and the cost of firm’s liability is not equal. If stock prices decrease, market value increases thus giving managers an incentive of employing more capital to the fixed assets. Moreover, the incentive of increasing capital investment will also maximize economic profit in the firm (Schroeck, 2002). Cost minimization in a firm According to Hirschey (2008), most companies seek growth even when they are faced by the never ending demand of reducing costs. There is a need to achieve growth while minimizing costs and this is achieved through a cost-reduction strategy. This strategy maximizes efficiency without compromising the company’s growth potential. In achieving this, the firm’s management has to resist pressure to implement indiscriminate cuts without having to affect the operations of the business. Core competencies are identified and efficiency is then improved. Moreover, the management of a firm can decide to outsource in order to minimize costs. This entails contracting business functions such as billing, human resources, or payroll to outside providers. Some companies go to the extent of outsourcing some of their operating processes. Despite the complexity of some of the measures that are developed to reduce costs, cost reduction remains an important measure in improving business operations. It not only results in higher profits but it also leads to the emergence of a stronger enterprise. Most managers and business leaders like to mitigate costs in their businesses but oftentimes encounter impediments (Hirschey, 2008). In preparing to reduce costs in a business, the management of the firm is faced by the need to lay important groundwork. The management has to establish a starting point and organize the operations of the business. However, there are methods that managers and business leaders may use to reduce costs but they are damaging to the welfare of the business. These include measures such as reduction of customer service, downsizing and cutting corners in the methods of production. During downsizing, company leaders reduce the number of middle managers or workers. This method is adopted without a consideration of its impact on the operations of the company. One of the main effects of downsizing in order to mitigate costs is that hardworking employees leave the company quickly in pursuit for greener pastures. This leaves a company with deadwood employees who perform below par (Hirschey, 2008). Reduction of customer service is also a detrimental way of reducing costs. This is because incase the company has a wide customer base; most of these customers are left un attended. This compels them to search for other companies that fulfill their demands. In the light of this, a firm should train its workers in order to reduce waste and equip them with changing methods and technologies. Moreover, the company should avoid getting low quality goods from the suppliers, as this is a source of waste for many companies (Brigham & Ehrhardt, 2010). Factors affecting cost in a firm Managers experience cost as a monetary expense in the firm’s income statements. They, therefore, make decisions to use cost benefit choices in order to maximize outcome and create greater success. This is because the rule is vital in allowing firms to utilize scarce resources such as time. Although cost effective is efficient in the production of greater returns, it is affected by several factors in the economy (Wong, Ormiston, & Tetlock, 2011). Business risk is one of the major factors affecting the determination of cost in a firm. This is because it is associated with promises of the firm to pay dividends and interest to other investors in the financial market (Hayes, 2001). Additionally, the risk is also associated with the firm’s response to its earnings before taxes and interest rate. Every project the management decides to undertake has a great effect related to business risk in a firm. Therefore, if the management decides to take a proposal with more risk than the prevailing ones, the firm has to raise capital cost in order to compensate increased risk. This depicts why the firm should not hire more workers as a result of increase in demand for their products. This is because demand may be high in the short run and later dropping in the long-run. Instead, management should hire temporary workers who can easily be laid off when demand fluctuates in future. Capital cost of a firm can also be caused by financial risk. This is caused by different composition of financial sources. Various forms of financial plans and capital structures greatly affect the availability of returns in a firm. In case a firm encounters a financial risk, it gets a higher likelihood of inability to meet financial charges in the economy. Firms under financial risk require greater compensation through financial premiums (Wong, Ormiston, & Tetlock, 2011). Factors for value maximization One of the core objectives of most firms is value maximization and this is achieved through the building of wealth by business owners. Value maximization is achieved when flow returns of free cash are maximized on capital invested in the business. Business managers prefer achieving value maximization without having to face major risks. In value creation and maximization, numerous factors are put into consideration. Moreover, numerous incremental steps and decisions are implemented over a long period. In the light of this, the business owner needs to recognize the interrelationships and individual factors that are involved in value maximization (Wong, Ormiston, & Tetlock, 2011). Decision trade-offs is a major factor to be considered in value maximization. Most decisions in a company involve trade-offs and this involves a recognition, thorough understanding, and quantification of the costs accrued by each alternative. The management of the firm has to decide on whether the action that the firm takes is building or wasting value. Brigham & Ehrhardt (2010) indicate that there are many factors that influence value maximization. Operational factors are among these drivers. They influence the way the firm maximizes its profits and are associated with actions that culminate in the direct reduction of expenses and increase in revenues. The sales price is among the operational factor. This price should be set at an optimal level in order to generate extra revenue without having to lose customers to competitors. Sales volume is another operational factor that aims at ensuring that value is maximized. The firm should aim at the sufficient quantity of service or product that must be sold to achieve value maximization. In case the volume of sales is increased without increasing the fixed costs, the gross profit that comes from additional sales will contribute to profits. The adoption of a good product or service mix is also important in value maximization. The firm’s management is faced by the need to have the right combination of services and goods such that unprofitable products can be easily identified. Lack of an accurate accounting system through which cost and revenue details can be identified leads to difficulties in achieving the desired levels of value maximization (Brigham & Ehrhardt, 2010). Investment drivers are also very important in value maximization in a firm. These drivers involve optimal management of the capital that is employed in the business. The assets in the balance sheets are of primary focus when looking at investment drivers. Among the drivers is the minimization of cash balances that are idle. The management of a firm should ensure that excess funds are kept in accounts that bear interest. Financing drivers focus entirely on the liabilities and the equity components that are on the balance sheet. Regardless of whether financing comes from the owners or the lenders, the main objective is obtaining the highest amount at lowest cost (Brigham & Ehrhardt, 2010). Measurement of growth in a firm Growth in a firm is when there is sustainable production welfare in the economy. In addition, it also translates to economic transformation in the production market, which leads to a higher profit margin. Therefore, measuring economic growth in a firm is normally achieved by quantifying welfare increase. In addition, economic growth can also be measured through changes taking place in financial and product markets. There are various scales that are used to measure economic growth in a firm. These scales are discussed below (Wessels, Marc, & Tim, 2010). Physical capital accumulation This is the most successful observation of economic growth as depicted by Solow’s theory in macroeconomic. According to Solow, higher accumulation of physical capital is crucial for economic growth (Offenbacher, 2007). This is because he assumed that total output in a firm obeys the production function. According to this theory, increase in the quality of output depends on labor and physical capital employed in the economy. Therefore, a well-behaved production function in a firm gives a perfect relating labor, capital and output. In this case, it is important for the management to make the right decisions while employing capital and labor in any project. When choosing the two inputs, the management in a firm should ensure they carry minimum cost. This is because minimizing cost will translate to higher profits leading to greater economic growth. Management in the firm should also enact decisions of increasing stock prices in order to have higher capital-output ratio. In addition, physical capital will also accumulate as a result of higher investment (Offenbacher, 2007). Therefore, firms should invest heavily in order to drive up economic growth. Higher income Economic growth is also measured through higher income, which is simplified through social and economic changes of shareholders associated with a particular firm. Total income shows total output in a firm thus depicting amount of output per worker. Higher income among stakeholders will, therefore, be achieved through the creation of higher dividend and interest. To enhance this, profit in the firm has to be increased by maximizing total output (Dumagan & Ball, 2009). Long-term earnings A company can measure its growth by looking at the earnings it remains with after it has paid taxes, costs, and expenses Companies that enjoy earnings that grow at a faster rate than those of their rival companies witness a better performance of the prices of their stocks. The growth of projected earnings is a measure that is used to estimate the long-term growth of a company’s earnings and is derived from the polled estimates from analysts. Sales growth is another measure for a company’s growth. This measure indicates the rate of increase in the shares of a company based on specific time periods. It is also the best way of measuring how the core business of a company is growing (Weil, 2005). Cash flow growth Cash flow growth is another measure that reveals the amount of cash that is being generated by a company. This is an important measure of growth in a company as it shows a company’s earnings before amortization, non-cash charges and depreciation. Moreover, it is a measure of solvency and liquidity and is sometimes called cash earnings. It reveals the rate of increase of the cash flow of a company per share based on specific time periods. In addition, this measure aids in determining the growth score of every stock and the company’s growth orientation (Weil, 2005). Analysis of management decision making The main concern of management, in a firm, is to improve decision-making. This is done through various approaches and management rules. Normative analysis is one of the major approaches that bases its ruling on logistics derived from economics and finance (Wong, Ormiston, & Tetlock, 2011). This approach uses multi attribute utility function in order to make the best decision. In this case, managers choose utility values of various decision alternatives and later selecting an alternative that gives the highest utility function. This approach is highly used to make management decisions that will maximize profit in a firm. Decision tree analysis is another approach that is used to determine the nature of management decision. This analysis entails laying out alternative choices and their utility possibilities. Expected value is then computed for every alternative. In this case, firm management chooses alternative with the highest expected value. This analysis is used to guide managers when making risky decisions such as expansion of their plant and marketing strategies (Wessels, Marc, & Tim, 2010). In decision-making, the manager is faced with faced by a situation whereby he or she has to formulate measures that will help the company to maximize profits while minimizing costs. Upon the identification of such important decisions to make, the manager has to seek information or delegate such a role to junior employees. Managers are expected to seek wide range of information in order to achieve a thorough clarification of their options (Wessels, Marc, & Tim, 2010). Managers are oftentimes faced by a situation in which they have to identify the potential causes of the company’s problems, the processes and people involved, and constraints that emerge when it comes to decisions that concern cost minimization and profit maximization. In the decision making process, the managers brainstorm solutions. This entails listing potential solutions in order have a comprehensive understanding of the issue. In this step, collaborative planning is done and the length of this plan heavily depends on the decision’s nature (Wessels, Marc, & Tim, 2010). Subsequently, managers are left with the task of weighing the merits and demerits of the potential solutions. Extra information is sought after and options are selected. The selected options have higher chances of succeeding and have the least cost of implementation. Outside advice is also important during this stage of managerial decision as a second opinion can help to provide a better perspective on the solutions to the company’s problems (Monahan, 2000). Following the aforementioned steps, the manager is faced by a situation whereby he or she has little time to delve into second guesses. The decision that has been reached is put into action. The manager gets all the employees on board and asks them to implement the decision. A managerial decision can be changed even after enactment and that is why savvy managers use monitoring systems in order to evaluate the outcomes of managerial decisions. In management decision-making, all business owners are sometimes faced by a situation in which they learn from their mistakes. It is important to constantly monitor the outcomes of strategic decisions that are made at the initial stages of the business. The is a need to adapt to formulated plans as quick as possible or to switch to other solutions in case the managerial solution that has been developed fails to produce expected results (Monahan, 2000). Conclusion In summary, managers are often faced with difficult decisions to make in order to ensure that business operations are not halted. The management of a firm has a board of directors who are entrusted with the responsibility of ensuring that business operations run smoothly. In order to maximize value while reducing costs, the management has to hire temporary workers and upgrade their machines. Moreover, there is the need to put the shareholders’ interests first as shareholders’ value should be maximized through decisions that facilitate the economic growth of the firm. It is also important for the management to address the stock prices in order to have a product and financial market that is efficient. This is because the prices of stock reveal the great performance of the firm’s management. References Brigham, E. F., & Ehrhardt, M. C. (2010). Financial Management Theory and Practice. London: Cengage Learning. Dumagan, J. C., & Ball, V. E. (2009). Decomposing Growth in Revenues and Costs into Price, Quantity and Total Factor Productivity Contributions. US Department of Commerce , 41 (2), 2943-2953. Hayes, R. M. (2001). Models for Library Management, Decision-Making, and Planning. West Yorkshire: Emerald Group Publishing. Hirschey, M. (2008). 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