Rajiv works for an IT company. For the Diwali purchase, he takes ₹ 300,000 lakhs loan. But a sudden medical emergency drains all his savings and salary. So he applies for a personal loan balance transfer in another bank that offers a low interest rate. Now Rajiv gets relief from his financial burden.
Let us explain to you in detail:
| Before Balance Transfer | After Balance Transfer | |
| Loan Amount | ₹ 3,00,000 | ₹ 2,85,000 (approximately after one year) |
| Interest Rate | 16% | 12% |
| Tenure | 5 years | 3 years |
| EMIs | ₹ 7295 | ₹ 9466 |
| Total Amount | ₹ 4,37, 725 | ₹ 3,40,779 |
A personal loan balance transfer is a good financial decision that saves your EMIs of the loan amount. A good financial decision requires a profound knowledge of financial literacy. Both in business and personal life, financial decisions play a crucial role. This blog enumerates the importance of financial decisions and its features.
What is a Financial Decision?
A financial decision refers to a choice made on financial matters. It influences the financial life of an individual or the business operations of a company. A financial decision involves making a budget, allocating funds, and establishing a stabilised financial life. Due to well-planned financial decisions, the Indian auto component industry has 11.3% growth.
For example, for those who had purchased ₹ 50,00,000 lakhs of 2400 sq. ft. of land in Bengaluru city in 2008, today the demand for the price goes up to ₹ 3,00,00,000 crore.
Types of Financial Decision
Financial decisions are three types:
- Investment Decisions
This type is also known as capital budgeting decisions. It is about how an individual or a company allocates its funds to various resources. The primary aim of this decision is to generate more returns on investments.
For example, if you had decided to purchase 1000 Axis Bank shares in January 2020 (₹748.70 per share), today you could sell it for ₹11,36,250 (₹1136.25 per share).
- Financing Decisions
It is to identify the right and reliable source of funds for the operation of the business. This source of funds is apart from the income of a business. Generally, there are two ways to source funds: equity financing and debt financing. Equity financing is the issue of shares by a company, whereas debt financing is to take loans for business operations.
For example, a company can have multiple sources of income, such as from product output and outsourcing.
| Income Source | Revenue | Profit |
| Product Output | ₹ 80,000 | ₹ 40,000 |
| Outsourcing | ₹ 45,000 | ₹ 12,000 |
XYZ Private Limited should think through the decision to eliminate outsourcing. This information was easy to decipher with the help of this table. Similarly, companies can look back at their financial decisions and cut costs or eliminate debts.
- Dividend Decisions
It is the distribution of profit earned by a company among its shareholders. A company can retain the profit for reinvestment or determine how much of the profit to distribute to the shareholders. Based on factors such as long-term goals, cash requirements, expenditures, and shareholder’s interest, determine the dividend policy.
For example, an investor of a company can get 50% of dividends
Features of Financial Decisions
- Data-Based: Financial decisions are influenced by financial resources, price fluctuations, money resources, and other economic factors. For example, a low repo rate by the RBI can change a bank’s borrowing interest rates to below 8% (approximately).
- Goal-Oriented: A financial decision focuses on the maximisation of returns, profits, reduction of input costs, and growth-orientated factors. For example, a premium plan worth ₹10,000 annually can yield ₹ 1,80,000 after 15 years.
- Risk Assessments: A decision-making process on financial matters requires assessment of risks. It is done to take preventative measures to mitigate loss. For example, the price of tomatoes was nearly ₹100 in June 2023 due to poor monsoon.
- Allocation of Resources: All the financial decisions evaluate the financial resources of a company. It is involved in figuring out the right resources for maximum outputs. For example, the output of ₹ 50,00,000 turnover and debt of ₹ 20,00,000 can accelerate a company’s growth.
Benefits of Financial Decisions
- Financial Security: A well-planned financial decision secures the future. Even if any unexpected events happen, a good financial decision secures all the sources of money.
- Efficient Financing: All the financial decisions influence the budget preparation. This ensures cash flow and minimises expenditure. This enables the smooth operation of the business.
- Goals and Growth: A good financial decision is goal-oriented. It can be either a short-term goal or a long-term goal. At the same time, it also promotes growth among individuals and business enterprises.
- Accumulation of Wealth: Financial planning should focus on wealth accumulation through profit, return on investments, and the company’s value.
Conclusion
Financial decisions are important for successful business operations. One who understands the required financial decisions can enhance their personal financial life or business operations. All the financial operations evolve according to the market trends. It is advisable to update on these topics and empower the decision-making.
