The developments in the financial sector have led to increased urge to gain more insights on financial economics and international markets. Most people lack knowledge and do not understand how financial markets operate and the effects they have on the economies of the world. The process of internalizing the way organizations and consumers react in various market context, the way capital sector works and financial decisions are designed to enhance organizational productivity are the essential features of economic and business managers (Simon, 1979). Financial and economic literacy involves the acquisition of knowledge and comprehension of financial terms and risks, the abilities, stimulation, and trust to adopt this knowledge and awareness to create good business decisions, which occur in a range of commercial settings, to raise the financial base of the organizations.
Organizational managers are required to understand financial matters since it forms the fundamental point of corporate strategies (Freeman, 2001). Managers should be able to understand and use economic data first by internalizing the concept of decision-making in both financial and stock markets. Understanding the various paradigms of business tools that are utilized in these markets the way they interrelate with the entire global economy. Integration of economic and financial components assist managers in designing a variety of skills to enhance the process of decision-making, organizational arrangement, and risk control.
Principles of Business and Financial Economics on International Context
Organization managers should make use of similar benefits of the international business that accrues across the globe through composite and varied locational advantages not only to dispose of their surplus but to also acquire production materials and the technical know-how. The principles of international business are established on two main theoretical perspectives , which include the resource-based and institution-based aspects (Leff, 1964). The resource-based perspective is concerned with the skills and materials available in the organization while the institution bas, which highlights the current variations in the organizational setting within the globe to which an organization should adapt to succeed. The latter focuses on political and socio-economic change and the approaches that organizations can adapt by expanding to international levels.
Financial economics approaches the decision-making process from two significant dimensions: first, when the results of the economic analysis are risky; second, when the findings and decisions made take place at different financial periods. The subject of financial economics is usually applicable in making investment decisions, especially in commercial settings, for example, the capital market, although it is also closely connected to the area of microeconomics that deals with savings and insurance. Financial economics is built on two critical tenets that include economic discounting and management of risks.
Financial Discounting
With time, business decision -making identifies the logic that the price of £1 in the next ten years is lower than its current value. The current value if discounted as approval of speculated financial risks, inflation, and other speculations about the future to arrive at its value in ten years.
Management of Risks
Most adverts on financial commodities, especially those related to capital is a reflection to possible buyers of the expected rise and fall in the returns of investment so that even financial economics builds heavily on microeconomics and basic accounting concepts. Besides, it requires familiarity with basic probability and statistics, since these are the standard tools used to measure and evaluate risk.
Identify and Explain the Impact of Governmental, Monetary and Economic Policy on Decision-Making in a Business Context.
The government should implement monetary and economic policies that will serve in regulating the activities of the firms as well as their impact on the economy. The Central Bank of every country implements monetary policies with the goal of controlling the amount of money circulation. It is, therefore, a fundamental requirement of the business organization from every sector of the economy to exercise these policies and raise the rate of economic growth. The central bank enacts monetary policies through the use of bank rates regulation, reserve ratios, open market operations, moral directives, selective credit control, and many other monetary tools. The organizational managers should formulate decisions based on the idea that each of these financial tools will result in either positive or negative changes in the amount of money in circulation and interest rates. These changes are generally referred to as contractionary or expansionary depending on the impacts it has on the interest rates.
Describe and Apply Macro and Micro Concepts and Models to Business Decision-Making.
Microeconomics is an area of economics which evaluates economic factors such as business organizations, the decisions they make and the impacts of such decisions in the entire market. Organization managers should be able to make business decisions concerning the scarcity of resources and business policies. Microeconomics takes into account the evaluation of both the demand and supply sides of the economy while accommodating the issues of excess supply and demand with their shortages. This implies that the results of business decisions developed by managers may bring influence in the overall market economy. Therefore, a better understanding of microeconomics will ultimately lead to a polished up decision-making process for the improvement of the organization.
Macroeconomics is a branch of economics the deals with the analysis of complex economic variables. It is focused on the study of the entire economy such as the growth rate and the level of National income, employment levels, the amount of government and private expenditure, the balance of payments, household consumption and investments, the amount of household savings and the movements in business cycles. The goal of macroeconomics is to sustain a level of macro equilibrium within the economy. It also includes the study of huge economic variables such as gross national product (GDP) and the employment levels. In almost all of the global economies, irrespective of whether they are controlled or not, macroeconomics and business are similar things, and in the process of making decisions, a track record of macroeconomic variables is vital (Saunders, 1997).
Managers find it challenging to make organizational decisions, but the knowledge in macroeconomics will assist them in managing their organizations. Critical business decisions formed by the corporate manager are based on these macro elements, which make up the general business environment. The level and the rate of economic growth affects investment and future demand growth rate in a more significant way.
Examine and Discuss the Relationship between Theory, Application in Business and Financial Economics in an International Context.
In global business economics, the idea of the economic theory is applied as an evaluation strategy in approach development. This comprises the formulation of assumptions and generating deductions concerning the assumptions made on the organization's behavior. These assumptions have some limitations on the economic theory of them since it does not give a logical description of the activities of the organization, rendering it unrealistic. Therefore, it becomes necessary to match theoretical approaches founded on simplified deductions with the actual operations of the business and creating suitable extensions and restructuring of the economic model. For instance, it is a common assumption that most firms aim at maximizing profits and the economic theory speculates the level of output from the firm with its selling price. But in reality, the objective of firms is not always about profit maximization, since some may opt to design a new product or even diversification of the existing product (LeRoy, 2014). To this end, the theory of the firm does not give a clear explanation of what the activities of the organization entail. In managerial business economics, the process of integrating economic concepts with those of accounting assist in the utilization of financial information on profits and costs more efficiently to fit the requirements of decision-making and future planning.
Financial economics utilizes the concept of economic theory to analyse the effects that time, business uncertainties, forgone costs and availability of information have on the development of incentives for a specific business decision (McConnell, 2009). Financial economics comprises of the development of global theoretical approaches to evaluate factors influencing a particular decision. In most cases, these approaches have the assumptions that households and organizations make rational decisions which are not true. Financial economics takes into account the irrationality of business decisions made by the parties as a possible risk factor
Interpret Financial Information (External and Internal) and Apply to Decision-Making within a Business Context.
Evaluation and interpretation of financial information with an attempt to identify the impacts and what financial information reflects so that particular speculations may be made concerning the future incomes, interest payment capability, debt maturity both in the short period as well as in the long term and the expected returns on well-formulated dividend guidelines. The main aim of doing financial analysis is highlighting of the strengths and limitations of an organization that carries out reorganization and evaluation of the figures available in financial statements. This is achieved through creation of accurate comparisons of different elements and evaluating the information it contains. The assessment and interpretation of financial statements involve the use of four main accounting procedures. The three primary methods comprise the task of an accounting expert in the accumulation and development of a general concept concerning the financial and active data, and the formulation of financial information includes:
Evaluation of every transaction to identify the accounts for debiting and crediting and the calculation and differences of every sale to evaluate the quantities involved.
Documentation of financial data in the journal, summarisation in business ledgers and the formulation of a working sheet.
Formulation of financial statements
The final stage in accounting is the evaluation and interpretation of financial statements leads to the presentation of economic data that helps the organizational managers, creditors, and debtors. Analysis of financial information includes some processes such as organizations, evaluation, identifying connections between the existing facts and developing relevant conclusions based on the financial statements (Higgins, 1995).
Types of Financial Analysis
The task of evaluating financial statements can be undertaken in various forms. In most cases, it is grouped into different classes concerning the information utilized and their modes of operation. Based on the financial information used, there are two forms of analysis:
External analysis.
Internal analysis.
The external analysis is a form of financial analysis designed from financial statements that can be easily accessed by the outsiders of the business (Hillman, 1999). Outsiders comprise of debtors, creditors, suppliers and governmental institutions that exercise some common control over the business. These parties have no rights in the retrieval of the company’s internal files and can only get the access to information for financial statistics from published documents (Levy, 1994). Internal economic analysis is developed with a particular reference to the information contained from internal business files and non-documented books. When carrying out economic analysis, the accountant is a part of the organization that owns the financial statements. Report for management in the internal form of financial analysis and is usually carried out by the top management and workers including governmental and court institutions which might exercise some control and other regulations over the company.
Discuss the rationale and impact of decisions for business strategies to users and stakeholders
A business’ competence in developing proper decisions is crucial for the overall success of the company. The managing group should be on the same level regarding the mission and goals of the organization to agree on how to achieve the objectives. Decision making concerning organizational techniques is essential for the management as well as the stakeholders in the process of pursuing business objectives. It is good to put in mind that every individual in the management group together with the organizational stakeholders have equal chances of contributing their views in the process of decision making and all their views are taken into account. Organizational stakeholders comprise of customers, workers and the government. Business performance has primary effects on the stakeholders. Most organizations have developed the perception that performance based on ethics and being answerable to all their stakeholders can help to improve their performance. The problem associated with each decision has varying effects on business stakeholders.
The impact of business decisions on stakeholders is that paves way for the smooth running of the business and reduces the chances of disagreements in the future (Campbell, 1997). Once an agreement about a specific course is arrived at with the inclusion of every stakeholder's opinion, there is less probability of conflicts coming up in the future. It also helps in the valuation of the company's capital since it is valued by the number of people who are interested in buying it. The value of capital is directly proportional to the performance of the company such that when a firm is performing well, the cost of capital rises and falls when the company's performance is deteriorating.
Conclusion
The above analysis developed on principal financial tenets is useful for organizational managers to understand the idea of cash flow and speculated benefits on investment. Evaluation of economic and financial components of a market enables organizational managers to arrive at suitable decisions on investment for sustained economic growth in the future. Adoption of various financial tools such as Present Net Value(NPV) and financial statements forms a platform where managers can evaluate the results of the finding to make the appropriate business decisions based on the financial and stock markets. The understanding of these basic financial and business techniques also assist business managers in identifying different points of business pitfalls and source of limitations. Once the cause of business failure has been determined, the managers can easily raise their concerns on how they can improve the overall performance of their organizations.
References
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Freeman, R.E. and McVea, J., 2001. A stakeholder approach to strategic management.
Hillman, A.J. and Hitt, M.A., 1999. Corporate political strategy formulation: A model of approach, participation, and strategy decisions. Academy of management review, 24(4), pp.825-842.
Higgins, R.C. and Reimers, M., 1995. Analysis for financial management (53). Chicago: Irwin.
LeRoy, S.F. and Werner, J., 2014. Principles of financial economics. Cambridge University Press.
Leff, N.H., 1964. Economic development through bureaucratic corruption. American Behavioral Scientist, 8(3), pp.8-14.
Levy, D., 1994. Chaos theory and strategy: Theory, application, and managerial implications. Strategic management journal, 15(2), pp.167-178.
McConnell, C.R., Brue, S.L. and Flynn, S.M., 2009. Economics: Principles, problems, and policies. Boston McGraw-Hill/Irwin.
Saunders, A. and Thomas, H.A.L., 1997. Financial institutions management. Boston: Irwin.
Simon, H.A., 1979. Rational decision making in business organizations. The American Economic Review, 69(4), pp.493-513.
