Importance of Investment Decisions: Financial Management Concept

Investment decisions play a significant role in promoting the growth and stakeholders’ wealth maximization. The firm makes investment decisions to acquire assets that will help them to make profits, grow, and compete more effectively. Effective decision making in an organizational context includes financial decision making. Proper utilization of resources is important to achieve long term success of the business. Investment decisions in a company are important for the following reasons:

  • Promotes the company’s long term growth
  • Influences the risks of the firm
  • Involves the use of large sums of money
  • Investments are irreversible at substantial loss
  • They are the most difficult decision to make in the firm

Growth: the effects of investment decisions stretch beyond the current financial period. They affect the firm’s long term growth in terms of size, speed and direction. Investment in assets determine the future direction of the firm. Choosing a specific type of investment over the other determines whether the company will be profitable enough to grow. A wrong investment decision can be detrimental to the firm’s survival and long term growth. Sustainable growth can be achieved if the business invests in viable projects or businesses.

Risk: Committing the company’s money to a specific type of project or investment comes with a risk. Each investment has its own unique amounts or risks; hence investment decisions affect the company’s risks, uncertainties and complexities. Financial companies should be careful when making investment decisions to ensure that they choose investment options that have the right balance between risks and returns.

Funding: Investment decisions usually involve the commitment of large amounts of funds, which makes it necessary for the company to plan its investment programs carefully and ensure that they have the right sources of funds. Making the right investment decisions ensures that the company utilizes its capital efficiently to maximize profits and minimize costs. A financial manager should assess existing sources of funds and choose the best investment option that can be funded well with existing funds.

Irreversibility: Most investment decisions are irreversible. Once a decision is made, the company ties its resources to the chosen investment for a long period. Wrong decisions leads to massive losses. For instance, a company can invest in a new technology using millions of dollars, and then the technology becomes obsolete almost immediately. A good example is Nokia when it invested in the Symbian operating system, which ultimately failed as Apple’s IOS and Google’s Android worked well for Samsung and other smartphone companies. Nokia was once the biggest mobile company, but its wrong investment decision irreversibly reduced it to a small company.

Complexity: Investment decisions are among the firm’s most difficult decisions. They are an assessment of future events, which are difficult to predict. It is really a complex problem to correctly estimate the future cash flows of an investment. Economic, political, social and technological forces cause the uncertainty in cash flow estimation. Companies need to make good investment decisions in times of uncertainties and heightened business risks to limit losses and ensure the survival of the business.

Leave a Reply

Your email address will not be published. Required fields are marked *