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The primary reason any rational and prudent investment is to make profitsafter meeting all the expenses. Therefore, investors tend to channel their resources into the most profitable ventures. To identify the most profitable undertakings, rational investors utilize a number of investment tools, techniques and strategies. For there to be sustainability of any investment, a strong understanding of the internal and external business environment is important. This helps in indentifying risks, competitors and other factors which may affect the investment. Therefore, the entrepreneur faces the challenge of balancing to meet the requirements of the business environment and to make a good return on the investment. Some business are setup without a clear analysis and much as they may make profit, it is at the expense of the environment. Thus it is important to study the environmental variables in order to gain a strong competitive advantage, attract and retain customers and at the same time gain a larger market share.
Meeting customer’s expectation
In order for a business to sustain a good customer base, they should lay strategies to that meet the customer expectation. In this way, they should provide a good customers service, understanding customers and what they want is the first step towards meeting the customer’s needs.
However, the business fails to meet the expectations of the customer, they shift business elsewhere. Good business owners usually learn to listen and address consumer complaints. Despite the fact that addressing customer needs improves business performance, some customer complaints require solutions that are not economically viable and may not meet the legal requirements for operation of the business.
Any investment decision bases on a decision rule which subjected to circumstances. However, making this decision should be based on the following input; cash flows, project life and the discounting factor. How effective the decision make is, depends entirely on how the above factors have been critically analyzed and assessed (Kelly 2010).A clear understanding of the business before implementation is required to produce a reliable estimation of the cash flow. The duration of the business also called project life is very vital. The cost of capital is considered as a discounting factor and therefore subjected to change over the year.
Capital budgeting is very important for any new business and it is grouped into two main categories: capital budgeting under certainty and capital budgeting under uncertainty. Capital budgeting (also known as investment appraisal criteria) under certainty is also broken down to two groups; non-discounted and discounted cash flow methods. The former capital discounting approaches do not put into account the value of money over time and are therefore only appropriate for short term businesses that do not last for more than a year. They include Pay Back Period (PBP) and also Accounting Rate of Return (ARR). The discounted methods are regarded as the modern technics since they put into consideration the value of money over time. These methods are; Net Present Value (NPV),Profitability Index (PI)and Internal Rate of Return (IRR). For the purpose of this paper, special emphasis will be put on discounted cash flow methods specificallyNet Present Value.
Net present value (NPV)
This technic takes into account the fact that cash flows at different periods of time carry different value and therefore its computation is expressed with present value as the common denominator. Net present value gives the current value of the upcoming cash inflows discounted using the rate of capital cost for the firm. Getting the Net Present Value involves getting the appropriate discount rate and converting the cash flow streams into the present value. The Net Present Value is obtained after a subtraction of the present cash outflow values and the present value of the cash inflows. NPV is employed to assess the feasibility of the project or business. When NPV is positive, the project is worthwhile, otherwise not (that is to say NPV should be greater than zero NPV > 0)
Therefore; NPV = PV (present value) of cash inflows – Initial investment
For the negative NPV, a sensitivity should be carried out further analysis whether adjustment in the factors like price and time would make the business feasible. Generally increasing the prices of the products holding others factors constant, increases the sales of the business, thereby increasing the present value of the inflows. There a significant modification of the prices mechanism can shift the NPV from negative to positive and thus making decisions the business profitable (Kelly 2010).
Enterprise Risk Management and corporate’s risk appetite
Risk is defined as an amalgamation of the possibility of an event and its consequences. Risk management is a focal point for any business organization. It is a method through organization address the risks associated with activities that are geared towards attaining the goals of the business. Risk management should be carried out and developed continuously for running the business throughout implementation of its strategies.
Risk appetite is defined as the amount of the uncertainty that an investment is able to incur so as to pursue their values. The management of risks cannot be isolated from strategic plans and daily decision making. Entrepreneurs should put into account of how much risk is acceptable in business as they pursue the goals of their investments (Kelly 2010).
A business with a low risk appetite may decide to forego an opportunity that has a big risk that may even have better returns. As the business strategizes the goals to pursue, special consideration should be made of their risk appetite.
However, as the saying goes “the higher the risk, the higher the profit”, some businesses with a high risk appetite may invest in risky ventures but with high returns. The extent of the risk taken should not exceed the risk tolerance. Operating within the bounds of risk tolerance ensures that the business rests within the risk appetite and therefore can achieve the set objectives. There are three steps in determining the risk appetite; developing the risk appetite, communicating the risk appetite, and monitoring and updating the risk appetite.
For smooth running of a business and to successfully achieve the business set goals, the business should invest to maximize profits but within its tolerance limit.The business should as much as possible work within the legal limits as it tries to meet the customer expectation.
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