For businesses as well as people, finances affect everything. People make decisions about what they can and can’t do based on their incomes and outflows. Businesses do this even more so, as their livelihood is tied to turning a profit. The impact of finances on how businesses make decisions fills books and is an area of study for business schools. A cursory review shows a few primary types of decisions that hinge on a company’s financial health.
Labor is one of the most important costs for a business to be able to securely sustain. No business wants to find itself unable to make payroll. Just as important, companies must look for return on investment when hiring, as each employee represents a significant dedicated cost. In many cases, hires and additions can expand a business’ capabilities; often, the cost of an employee is an investment in growth and revenue increases.
When finances are severely strapped, labor is an area in which many companies trim. When finances allow, however, companies may take personnel-related risks to achieve growth.
In the American marketplace, businesses constantly strive to grow to increase revenues, margins and profits. The formulas for exactly what a company’s financial position needs to be in order to grow vary widely by industry, size of business, market and even the taste for risk of the management and ownership. As a rule, however, a company needs a certain amount of available capital in order to enter new markets, lines of business and even to expand vertically in its line of business.
Available capital is defined broadly and often includes cash on hand, available credit and investment capital. When a company lacks these resources, growth may stagnate or be unattainable.
When finances are tight and the chips are down, a company often begins making decisions to cut costs in order to preserve profit margins or even its viability. Decreased revenues may lead companies to become tighter on supply purchasing, travel expenses, new initiatives, training and equipment. Smart companies look for optional expenses, more efficient ways to do things and maximizing purchasing power to get discounts from suppliers and vendors.