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Financial Decision Making and Theory

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The aim of this research is to provide an overview of financial decision making and theory and practise according to which the decision has been taken. In this research the risks faced by any person or company in financial decision making and the strategies adopted by companies will be discussed.

Decision making is plays an important role in progress of any company. Basically there are some set goals and objectives according to which company make their strategies and take financial decisions. Intelligent decisions put company on a progressive way and all this depends on the financial manager that how to make the strategy, how to follow a set plan of strategies and how much will be the success.

Making right decision at the right time will lead a company to success, for this purpose one have to analyze the resources and then define some goals. Different strategies will be brought in to action to achieve those objectives and goals. Afterwards what will be the impact of investment for the company and how much profitable it will be also the role of taxation will be discussed.

Chapter 1: Background and Introduction


Decision making is an important and necessary part of everyone's life. When it comes to making business decisions i.e. where huge money is involved, and loss and profit make a big difference then financial decisions will be more risky, and difficult, however there will be certain rules and procedures by which risk of financial decision can be reduced or minimize the loss.

The process of corporate decision making is the most important decision for effective management. Decision making process is based on expert's knowledge and experience. The good financial decisions help the organization to generate profit effectively, if the decision is accurate, business in specific time will be successful, and however poor decision could lead to failure of business (Mind tools 2007).

Every firm have some objective and goals because if there are no objectives and goals, then there is no point to struggle and hard work and therefore no development and success. According to those goals and objectives there will be a vision and mission of company and then some strategies will be defined to achieve those objectives. Profitability is the basic aim behind every strategy because it will help the company to forecast their profits, revenues and profits according to each strategy.(Lumby,S 2004)

When deciding on an investment opportunity, one has to consider the risks involved. As an investor or manager makes decisions on which project to invest, consideration must be given for the Net Present Value (NPV) of the different projects from which to choose. Afterward, a good investor should conduct sensitivity and scenario analysis as well as a risk analysis. Sensitivity analysis shows NPV under varying assumptions, giving managers a better feel for the project's risks (Ross et al, 2005). In the real world, it is likely that there will be many variables affecting a project. The sensitivity analysis only modifies one variable at a time. This is where the scenario analysis comes into play. Scenario analysis examines a project's performance under different scenarios (Ross et al, 2005). Finally, the break-even analysis helps to calculate the figure at which the project breaks even. This is useful as Company want to know how bad forecasts must be before a project loses money. All three analyses help an organization or individual understand the risks involved in a project. The goal of dissertation is to analyze the risks associated with the investment that will help to make financial decision.

Profitability index is a good tool to help determine which of the projects will give the company the highest value after investment. As a financial analyst, it is extremely difficult to eliminate bias for analysis. One has the option to adjust his or her stance and can choose to be conservative, moderate or aggressive. The value of the NPV, IRR and PI can be higher or lower based on the position that the financial analyst favours the most. This is a risk as it also poses some form of bias relating to the financial analyst's view. The results would not show the true stance of the company, rather it would show the analyst's view. To mitigate this risk, a strategic analyst will make decisions based on a combination of results and abstain from decisions based on his or her own stance (Ross et al, 2005).

The fact that no one can be certain as to how the economy or market will perform in the coming years also poses a major risk. As the values are selected and decided, outside factors might have a major effect in the following years that will skew the current values. In the Financial decision making, no information is given on the stability of the market. If the market is not stable, predictions could not be made to a certain extent, thereby making investment decisions risky. To mitigate this risk, the concept of forecasting needs to be applied. Although forecasting would not eliminate all risks associated with the future, it may help identify and evaluate risks, clarifying factors and reveal assumptions (Veryard Projects, 2001). Forecasting will help to identify future risks in order for the companies to create a backup plan. Environmental scanning is also another mitigation method as it will help identify external factors that might pose a threat to their decisions (Veryard Projects, 2001).

The Risk element in concept of investment decision is an imperative factor in the valuation of likely investments. Risk and risk management are at the core of an investment's success. Risk refers to the volatility of unexpected outcomes, usually relating to the value of assets or incomes gained from them (Jorion and Khoury, 1996). In simple words, risk refers to a measure of the possibility of being 'surprised'. A key concern for financial institutions and investors is the enormous issue of market risks. Risk can be categorised into number of types but a clear understanding of Financial Risk is beneficial in evaluation and monitoring of investments. Financial Risk is the variability in the investor's returns. Investors can considerably reduce the variation in returns by carefully investing in two or more assets.

Finally it is concluded that decision making is all about compare possible options and alternatives and financial decision is totally based on the theory of valuation because company valuation is necessary in order to make multiple alternatives and in all types of decisions there are same essential concepts involved which has exclusive features in the valuation and later on decision making process (Lumby, S 2004).

These strategies help in making intelligent decisions by analyzing the given or required information. These strategies also help in selecting the best possible action based upon the consequences of decisions and also work out the significance of individual aspects (Mind tools 2007).

Aims and Objectives

The aim of this dissertation is to reduce the risk of financial decision making. To define a way for the managers by which they can reduce the risk of uncertainty and they can identify that whether to invest in this business is profitable or is there any risk of loss. There will be certain processes and procedures. By following them financial decision making will not very difficult and after investing these process will also make an estimation of the profit or loss. The main objectives of this dissertation will be as follows:-

Identify the risks in financial decision making process.

Define the methods and procedures to minimize the risk.

To calculate that after investing in certain project what will be the impact of that investment i.e. Profitable or not.

What will be the taxation effect?

These objectives will be addressed in the different sections and then based on the research and findings a conclusion will be defined at the end.

Chapter summaries

This dissertation consists of an Abstract and five further chapters. In first chapter will be a thorough introduction of dissertation and about the aims and objectives

In second chapter the literature review will highlight different areas of research and about the objectives to be achieved.

Research methodology will be described in the third chapter and in this chapter different methods using during the research will be explained and also the collection of data.

Chapter four will be about the outcomes of the research and there comparison with literature.

Chapter five will be about the conclusion and recommendation by analyzing the objectives through different methodologies that what the final outcome of the dissertation is.

Chapter 2: Literature Review

Responsibilities of Financial manager in investment decision making

The financial manager is the person whom primary responsibility for financial management in a firm. The financial manager must act as an intermediary standing among financial markets and the firm's operations, where the firm's securities are traded. The role of financial manager is very complicated it's a two way process. Firstly, maintain a cash flow from shareholders to company and secondly from company to shareholders. This cash is for the purpose to acquire real assets used in and by the company operations and expanses. Later on if the performance of company is good and progressive these real assets generate profits for the company which works as cash inflows and finally this profit is returned to the shareholders who have earlier made the investment (BusinessCreditInfo.com, 2006). This shows that the financial manager has to deal with capital markets as well as the firm's operations. Therefore, the financial manager must understand how capital markets work.

The financial manager must undertake certain specific duties to carry out the responsibilities satisfactorily. Some of the main duties are summarized by the following;

1. The financial manager is continuously involved in financial analysis to monitor the financial performance of a firm. For example, financial manager has to ensure and provide adequate financial control such that funds are allocated in an efficient manner.

2. The financial manager must ensure that the firm meets its day-to-day cash requirements.

3. The financial manager advises on the acquisition of fixed assets such as cash, market securities, accounts receivable and inventories.

4. The current and fixed assets of a firm are usually financed through a combination of current and long-term liabilities, and equity, or shareholders' money. The financial manager must ensure that a firm invests in the types and amounts of fixed assets needed for efficient operation.

5. The financial manager must pay attention to the welfare of the firm's shareholders. In this regard, financial manager needs to develop and implement a dividend policy which is acceptable to these shareholders.

The fundamental financial goal of any organization is to maximize the stockholder's value. In general, an increase in stockholders wealth means that value has been added to firm assets and wealth of society has generally increased. In addition, stockholders are satisfy to contribute cash only if the decisions made to generate at least equal to the returns that stockholders could earn by investing in financial markets. Otherwise, shareholders might be wanted their money back. (Ardalan, K 2003)

According to Van Horne J., (2007) stated that maximization of profits is regarded as the proper objective of the firm; however, maximization of profits is not as inclusive a goal as that of maximizing shareholder wealth. For one thing, total profits are not as important as earnings per share. A firm could always raise total profits by issuing shares and using the proceeds to invest in Treasury bills.

The viewpoint of financial manager and stockholder regarding to maximizing share value are as following (Arcas, 2007);

1. The viewpoint of financial managers is creating high retained earning or profit to the company. Whereas, Shareholders consider to dividend and stock price of the company so the aim of the management is always to make the company profitable and progressive to maximize shareholder's value. The makeup of the shareholders can change without affecting the operation of the corporation whereas the decision from financial manager could imply the trend of shareholder's wealth.

2. Long-term and Short-term; financial managers: good financial managers will have a long-term plan to increase share value along with the current market situation. Meanwhile stakeholders and shareholders may desire to get the higher return with short-time period. Therefore, they may change and move around to find more profits.

3. Ethics in management; unethical financial manager may attempt to find the short-term prosperity and give him/herself a return in many kinds from company compensation. Meanwhile stakeholders: the inappropriate practice may lead to the unacceptable image and may relate to the industry wealth. In addition, shareholders: the unethical decision from manager could pull down the share value and may result in bankrupt if the owners are not promptly action to solve the issue.

4. Different Opinion in a type of investment to increase the shareholder wealth between financial manager and Shareholders because each person may see the high return from different perspective and the best decision can not be concluded. For example, stockholders may not think about risk of the possible earnings stream. Stockholders want to increase stock price by increasing the risk. On the other hand, financial manager who looks at the overall pictures for long-term goal, financial manager want to accelerate good performances of the company by limiting the risk that the company should take.

Market price is the performance indicator for any company. It tells that how much company is earning and also the management performance on their shareholder's behalf. The management is under continuous review. If a shareholder is dissatisfied with management's performance, he/she may sell his/her shares and invest in others company. This action, if taken by other unsatisfied shareholders, will put downward pressure on the market price per share. Therefore, the company cannot survive and raise the fund on as favorable terms as possible in the market which impact directly to the financial manager.

In short, financial manager has important roles in managing financial in the firm, dealing with conflictions either boards of director, employees or shareholders, which made financial manager requires short-term and long-term viewpoint to increase financial status and to maximize shareholder value.

Techniques used in financial decision making and risks involved

Researches show that investment decisions which are made, no matter in large or small businesses are mostly dependant on Capital Budgeting techniques. According to Jones and Smith (1982), an American engineer has first use the present value calculations to calculate non financial investments back in 1887 who were really concerned with the railway construction economies (Jones and Smith, 1982). It is also seen that Fisher's (1907) seminal work called 'The Rate of Interest' is first discussed by an American economist evaluating in finding net present value.(Fisher, 1907). Capital Budgeting, frankly speaking is the process of generating, evaluating, selecting and following up on capital expenditures (Study Finance, 2007), or in other words the planning process used to determine a firm's long term investment.

According to Maccarrone (1996), in the last few years capital investment has boost in decision making and further believes that most of the theories about capital investment's behavioural aspects and about the association between investment decision. (Maccarrone, 1996). Also looking at the research paper by Fourcans (1987), where he says that, in the success of all big names and multinational companies' capital budgeting is the most popular strategy and plays very important role in the development of any organization. As other techniques there are some drawbacks, ambiguity and risks involved in using capital budgeting as Fourcans (1987) focused that when you use certain strategies in business, a certain risk level is associated with each technique (Fourcans, 1987).

As mentioned before, majority of investment decision which take place are mostly backed up by capital budgeting techniques, but in real life, not all companies follow the same type of techniques. The type of techniques they use sometimes depends on their size or on the position of the business in the market. In this report wewill be looking at different business positions and list the type of techniques they use based on research.

Also there will be a discussion on looking at the risks and uncertainty involved in capital budgeting techniques because theories and researches suggest that quite a lot of time the results from capital budgeting are inefficient and in-accurate.

Technically speaking, every investment project is worth the go if the net present value (NPV) is positive, but according to Holmén (2005) this is not always the case. For the calculation of NPV, different cash flows of a project required and then discount them at a given discount rate. Discount rate is the risk of cash flow for which the price is charged by capital markets.

The formula for NPV is


t is Time of the cash flow.

r is The discount rate.

Ct is the net cash flow.

The stockholders from big organizations think that discount rate is a risk according to the strategy that affects the project value. During capital budgeting, the deficiency of capital markets, bankruptcy costs were mostly ignored when there is capital market imperfection (Holmén, 2005). This reason is also backed up by Stulz (1999) who believes that there are certain aspects which are neglected while making decisions based on NPV (Stulz 1999). There is no doubt that NPV is the most commonly used technique, but there are also other alternates like payback period etc. The payback method used is consider the most imperfect method because firstly it overlooks cash flows and secondly time value of money; this factor is ignored. According to Graham and Harvey (2001), which is also a surprising fact that 57% of Corporate Finance Organizations (CFo) apply payback method for capital budgeting decisions and 76% use NPV method (Graham and Harvey, 2001). Koedik et al (2004) says that the method of payback is widely used not only in Europe but also in UK, Germany and France. It is second largely popular technique in Netherlands subsequent to NPV (Koedjik et al, 2004, pg 71-101).

As stated previously in the report, most of the organization use capital budgeting in different ways and techniques depending on the size and growth because if a company is bigger in size and position is stable then they have higher expectations and they will use more complex techniques because they have extra shares in the markets and they have got enough time to achieve what they have budgeted. As mentioned in the research done by Holmén (2005), large and growing organization, the majority of them use NPV more willingly then other techniques (Holmén, 2005).

Even Ryan AND Ryan (2002) states in his research that NPV and IRR is most popular capital budgeted technique in progressed organization. Patricia and Glenn's research was done on 1000 companies and the outcome was, about 49.8% big organizations use NPV and on the other hand 44.6% use IRR with the possibility of using each more commonly being 85.1% and 76.7% respectively (Ryan and Ryan, 2002).

Collis and Jarvis (2000) say that in small companies financial decision is all depends on owners and managers that how they use their resources and information to manage and control their process (Collis and Jarvis, 2000). Consequently, According to Peel and Wilson (1996), if financial management practices in the small firm sector could be improved significantly, then fewer firms would fail economic welfare would be increased substantially (Peel and Wilson, 1996).

Normally in practise small companies tend to follow the criterion of big financial names but according to their size and growth they make their own policies and strategies with clear intention keeping in mind their objects and goals and are quite similar like the big organizations are following. These can be explained critically as follows. First, the financial management practices of large firms are neither conclusive nor indisputable. On the contrary, they are controversial and continually changing (Johnson and Kaplan, 1987). Second, the larger companies themselves, even with highly skilled and experienced staff, do not always stick strictly to standards defined by them so could not avoid the serious failure in real practise of financial decision making (Jarvis et al., 1996).Third, many research studies have demonstrated that because of the structure small companies do not function in the circumstances as large organizations because of the different environment, economy and financial restrictions (Curran, 1990).

According to McMahon and Stanger (1995), because of different size and growth there is a difference in operation environment and so in the level of risk and uncertainty (McMahon and Stanger, 1995). So it can be said that uniqueness of small firms required financial strategies which suits to its requirements and which are designed to fulfil its requirement according to their scale and quite similar to the strategies of big successful organizations (Jarvis et al., 1996). Small organizations have limited resources to manage the strategies in the real world as compare to the big organization (Jennings and Beaver, 1997). So the fact is that small companies have different environment and conditions as compare to large organizations because the decisions making capability of small firms is often unstable by success point of view which big organizations don't face many times.

According to Taylor III (1998) research, when assess the investment management there are two perspective namely local and global. In local perspective company performance can be calculated by its smaller units and then combine them on a local level. If performance of the company at the local level is good then it will maximize the performance of the organization as a smaller component. Local measures include usually Pay back method, IRR (Internal Rate of Return) and NPV (Net Present Value). On the other hand global measures assess any company performance as complete unit. If the performance of company as complete unit is fine it will maximize the performance of the organization completely. In global measures ROI (Return on Investment) net profit and cash flow techniques are being used (Taylor, 1998).

As above explained that the difference of capital budgeting techniques in small and big organizations. Now see that do these techniques make any difference in public and private sector. According to Habib et al (1997) tells how financial decisions made. In his paper he said, Recent developments, such as privatization and the private finance initiative, have raised the issue of which assets should be owned by the public sector and whether assets have different values in the public and private sectors (Habib et al 1997). The research shows that there is a difference between capital investment in each sector and in different organizations depending upon their size, capabilities and growth and how well establish companies maximize shareholder's value and how finance managers take decisions for the benefit of shareholders.

As the research continues it tells us that NPV (Net Present Value) is used to calculate shareholders value but calculation by NPV shows a risk in the financial market and more research shows that calculation by NPV calculation in evaluating the risk factor is efficient or not. Further research shows that projects using NPV in most of the public sectors are quite similar so the outcome is also similar which will help in getting the profitability and maximize the shareholders wealth (Habib et al,1997).

Capital budgeting techniques which are frequently used these days in every organization do involve certain amount of risk. In investment decisions the techniques involved not always give perfect outcome. Drury andTalyes (1997) in their research say that for a long time capital budgeting techniques in UK and USA and using all four techniques of capital budgeting i.e. NPV, IRR, ARR and PBP. Further says despite the increased usage of the more theoretically sound discounting techniques, several writers in both the UK and USA have claimed that companies are under investing because they misapply or misinterpret discounted cash flow techniques(Drury and Tayles, 1997). Other writers like Finnie (1988), Hodder and Riggs (1985) and Kaplan (1986) say that firms are guilty of rejecting worthwhile investments because the improper treatment of inflation in the financial appraisal; inflation affects both future cash flows and the cost of capital that is used to discount the cash flows (Finnie, 1988; Hodder and Riggs, 1985; Kaplan 1986).

Amongst the risk involved in the investment appraisal techniques is the use of excessive discount rates. Dimson and Marsh (1994) say that many UK companies may be using excessively high discount rates to appraise investments and, as a result, these companies are in danger of under investing (Dimson and Marsh, 1994). Porter (1992) says that in the USA it has also been alleged that firms used discount rates to evaluate investment projects that are higher than their estimated cost of capital (Porter, 1992)

Ehrhardt and Daves (1999), in their research for unusual and extraordinary cash flows, say that by ignoring cash flows, capital budgeting results are incorrect which are

Quite large

From normal operating cash flows risk are quite different

Not part of companies normal operating cash flows.

There are some risk avoidance methods which can be used to get more accuracy in investment decisions. These methods and techniques can be used for the future purposes in taking financial decisions (Ehrhardt and Daves, 1999).

Take right decision at the right time is important so to get good outcome from capital budgeting it is essential to use right technique at the right time. (Pollet et al, 2006). Research shows that there is a difficulty in calculating the theory of capital budgeting and find different opportunities of investment and when making investment decisions the market should be consider positive. Further it is observed that organization using complex budgeting techniques to achieve their high standard goals and objectives for short term and in order to gain maximum market share, but on the other side companies with high goals for long term use target oriented strategies which are not very difficult to achieve (Della Vigna and Pollet, 2006).

Chapter 3: Research Objectives

Research questions

How much external and Internal funds impact on Corporate financial decisions and how?

How corporate capital structures effect the financial decision making?

Has tax effect in corporate financial decisions? If yes how and how much?


To find out the financial decision making process of a company and the basic ideas on which that decision is based.

To identify how taxes affect the process of financial decision making process and how much the effect will be?

To find out how different type of investments effect the financial decision making process and how much the effect will be?

To research how can we reduce the risk of decision making in the industry using corporate financial decision, how a company should make its decision and which aspects a company should be concerned about while making an investment decision?

Chapter 4: Methodology

Research Philosophy

According to Remenyi et al (2003, p.32) positivistic philosophy aims at the derivation of laws or law-like generality which are related in natural and physical sciences. In quantitative research the researchers are allowed to understand the concept of the problem which is under observation. Facts and the causes of behaviour is the major emphasis area(Bogdan and Biklen 1988), in which the numeric information can be calculated, and summarized using a mathematical process and then the final outcome which is in statistical terminology is formulated (Charles 1995).

There are two features common in realistic philosophy and positivism philosophy: a belief that for data collection in social and natural sciences the approach is almost same and for explanation and assurance to the view that scientists normally pay attention to the external reality (Bryman 2001).

The interprevistic philosophy in contrast, emphasize that the suppositions of both philosophies are unnecessary; especially in cases where many factors manipulate the objective of the study, very complex to separate and control in experimental laboratory settings (Hirschheim and Klein 1994). Qualitative research, generally defined, means any kind of research that generates result not arrived at through quantification (Strauss and Corbin 1990, p.17) and which take place from real-world circumstances (Patton 2001, p.39).

In this situation this study is using interprevistic approach because the findings i.e. how to make investment decisions and how much will be the risk in that decision and how much will be the impact of that investment afterwards is really difficult to calculate exactly and also is a complex collection in real-world scenario, so it will not appropriate to use positivistic approach.

Research approach

Inductive reasoning implement to the situations where measurements or some particular observations are formed towards formulating broader conclusions, generalizations and theories (Saunders et al. 2003, p.87-88). The deductive reasoning is the approach in which one start thinking about generalizations, and then continues towards the particulars of how to implement the generalizations (Saunders et al. 2003, p.86-87), mostly applicable in disciplines where agreed facts and established theories are available (Remenyi et al. 2000, p.75)

From the following table will tells the major differences among inductive and deductive approaches and in this research, inductive approach will be used as it is best suitable for an interpretivistic research.



Processing from theory to data

high structured approach

collection of quantitative data

independence to researcher

understanding research context closely

realization that the researcher is the part of research process

collection of qualitative data

providing flexible structure allow to change the research emphasis by the progress of research

Deductive and Inductive Research(Saunders et al. 2003, p.89)

This research can be classified as inductive despite the fact that it contains few elements from deductive reasoning. For all management and business studies where established and accepted theories are difficult to be available, inductive reasoning is appropriate approach (Remenyi et al. 2000, p.75).

Research strategy

Research strategy is an important step in research design for collecting data, therefore, the researcher has chosen:-

Exploration Phase

Testing Phase

Exploration Phase

There are limited theories about financial decision making as already discusses in chapter two. So the first step is to explore that how these decisions are made in real-world or in practical context. For appropriate research strategy, most of the literature suggests using case studies for exploration and discovery (Benbasat et al. 1987; Hutjes and Buuren 1992; Lammers et al. 1997) Banbasat et al. (1987) explained three reasons that why case study method is appropriate research strategy for discovery or exploration:

In natural environment, the researcher can study the study phenomenon and learn to generate from theory, experience and practice.

When process proceeds towards complexity researcher can answer the questions leading to the understanding of nature.

It is a suitable way to research a formerly little area.

During the explanation phase, a methodology is created by critically evaluating the literature review. The literature review can be helpful in understanding and decision making process. According to Yin investigates a contemporary phenomenon within its real life context, when the boundaries between phenomenon and context are not clearly evident (Yin 1994, p.13).

Testing Phase

Testing is a process which is used to validate the methodology in order to understand the different aspects of financial decision making process. Therefore, the author has used testing to assess the capability of a company in investment area, and how it could be possible to improve their financial decisions. The Researcher has used Interviews and case studies as a research strategy.

Chapter 5: Research Methods


Qualitative research is a systematic method of inquiry which follows a scientific in depth method of problem solving deviating in certain directions (Thomas and Nelson 2001). With qualitative research a hypothesis is often not given at the beginning of research studies and develops as the data unfolds. The researcher is the primary data collector and analyser. Data can be collected via interviews, observations and researcher-designed instruments (Thomas et al. 2001). The goal of qualitative research is the development of concepts which helps us to understand social phenomena in natural (rather than experimental) settings, giving due emphasis to the meanings, experiences, and views of all the participants (Pope and Mays 1995). The researcher is able to gain an insight into another person's views, opinions, feelings and beliefs all within natural settings (Hicks 1999).


Interviews can be informal and casual to the formal, clinical interview. The advantages are good reportcan develop between the interviewer and the interviewee. This can help to gain honest information which is important when sensitive or personal information is required if allows people to open up about their experiences and it allows the interviewer to gain more background rather than just answers to questions. The success of the interview relies on the interviewer and therefore is open to verbal and non- verbal clues, frowning and putting their opinions to the interviewee. Also refusal to be interviewed can make the sample biased. These interviews can also be formal or informal (Saunder et al, 2003). The researcher has conducted 5 interviews with finance managers, internal auditors and stock brokers and had discover different aspects in financial decision making, strategies to minimize the risk and the afterwards impact of that investment.


Time horizon

Financial decision making is relatively time demanding process. Although the objective set on the research would have to achieve a conductive productivity in allocated time frame still few processes are time consuming. In exploration phase, the objective is to investigate the decision in practical framework whereas in testing phase the aim was to validate and propose a methodology according to which the decision has been taken. The case study approach doesn't allow changing objectives in different development stages so cross-sectional approach in time horizon is appropriate for this situation.

Strength and weakness of interviews

There are some advantages of interviews both telephonic and face-to-face i.e. in face-to-face interviews it is easily to interact with interviewee and easy to understand the information due to the verbal communication and non-verbal communication which is expressed through the observations of the gestures. In telephonic interviews, it is easy to interview the participants in the given period of time without being present at a specific place. The participants can also keep their identity anonymous and provide the information which he/she would like to reveal. As the research proceeds towards financial decision making where relevant information of various experts would help the author to critically evaluate and obtain findings, This procedure could be easily accessed by having telephonic conversation with as many experts required and derive a conclusion accordingly.

The researcher has faced some problems during some interviews e.g. during telephonic interviews it is difficult to judge the face expressions and gestures of client as it helps a lot in analyzing the information. The disadvantages of are, it can be time consuming and more than one interviewer can introduce bias.

Validity and Reliability

In order to find the information it is necessary that it should be valid and reliable. According to Saunders (2003) validity is concerned with whatever the findings are really about what they appear to be about. Is the relationship between two variables a casual relationship? the writer has designed the interview questions in such a way that it will cover his objectives critically and also author will be able to analyze the data accordingly.

Reliability can be assessed by three points (Easterby-smith et al., 2002:53)

According to Saunders (2003), there are always some drawbacks so as reliability. When designing the interviews the researcher is concerned about the observer error so keeping this in mind the interviews questions have designed. The other thing is biasness. It is very difficult to be unbiased but author has taken extra care when interviewing not to be bias with any of the interviewee.


Research Findings

Q1. What do you think about financial decision making plays a role in development of a company and how important it is?

Participant D: - Obviously, financial decisions have a vital role in any organization. You can not forecast or assess your future targets, the targets you have met and targets you need to achieve and profits. As far as how important is concerned, it depends on the decision and the team behind the decision making process that how much they have worked out before making that decision?.


According to this answer, the most important information researcher have got is, decision making is a complex and time taking process and organization's progress and future development is based on such these decisions and it can be successful and unsuccessful for the organization. The researcher also got that it all depends on the people who have worked hard and done enough research to make that decision intelligent and worthwhile.

Q2. What are the factors which one should consider while making investment decision for the company?

Participant A: - well there are lot of factors that a company should consider in this process but initially what I think that Return on Investment (ROI) is necessary that whether the investment in this project is worthwhile or not. You know what I mean and then company valuation because without it will be a lot difficult e.g. Weighted Average Cost of Capital and Discounted Cash Flow etc. but I think is DCF (Discounted cash flows) is good one and also some ratios should also considered e.g. Return on Assets (ROA), Return on Investments (ROI) and Return on Equity (ROE) etc, they will be really helpful.


The researcher has got that some calculations should be done initially i.e. estimate the return of investment (ROI) because if the investment is profitable then it is good to invest in that project but if it is not then there is no point to proceed. The researcher also came to know few techniques in decision making i.e. calculate the company valuation through different methods e.g. WACC and DCF. The few ratios should also be calculated to make better decisions e.g. return on assets, return on equity.

Q3. How to assess the risk in the financial decision making and how to overcome to the fact?

Participant E: - Assess the risk, I think is not very easy at the early stages of decision making but as soon as you start calculating about company's valuation and all that you can analyze a few risks.

Targets are the most important clause in any outsourcing contract. Organization before taking outsourcing decision always expects targets to be achieved by the service provider. However, as it has been studied earlier when the contact got renewed in 2003 between both the parties, targets were not cleared. However, the targets set up by the top level management in Vertex, managers and employees were able to achieve the targets in the beginning year but they focused on targets not on level of service. The companies who focus on target not on service level, though targets are also important but failed service level could lead the organizations to disaster.

Q4. What are the merits and demerits of an internal and external finance of a company in making these decisions?

Participant C: - Well, that's a long question. Internal financing you mean capital investment,

The author has found out that the reason for discontinuation of the contract was started with in the organization. Vertex HR employees to make most of the incentive hired all most of the people who were able to communicate in English. Incentive was not the only reason; pressure from top level and the process requirement were the other reasons. The training process in India, first employees have to go through voice and accent training where trainers train employees to understand British or American accent depend on the process and then process training. Here, vertex failed to give high quality training which resulted employees were not able to communicate with British customer and customer would not able to understand their accent which caused poor customer service. Another reason identified from the interviews is the false promises to the customers. In order to reduce the hold time and lack of process knowledge employees were giving false call back promises to customers to resolve their problem. Powergen UK launched so many complains regarding this issues but all the issues were neglected by Vertex top level management and manager on the floor (Call centre). Though, it has been previously studied that because of the lack of clarity and misinformation in the MSA by the Powergen UK interrupted Vertex to serve their duties. However, after the interviews with the managers it seems to be the internal issues with in Vertex were the main Problem, and only small percentage could be added as a reason for the discontinuation of the contract.

Q5. How much taxation effect in progress of company?

Participant F: - taxation, yes it effects. Some times it effect a lot but I think in the past decade taxation in financial section has increased a lot but it doesn't applicable before investment

Vertex India Pvt. Ltd. did take certain steps in order to preserve contract with Powergen UK. However, the interviewee did not know any thing in details. Vertex India Pvt. Ltd. filed a case against Powergen UK for violation of contract. The contract were signed for nine year in 2003 but because of the major issues contract had to cut down for seven years in 2006. However, the contract got immediately terminated because company was not able to improve their quality of service. Vertex had to take short-term prohibit to prevent Powergen to terminate the contract. As, it has been studied in literature review Vertex did not give valid reasons that would give injunction in favour of them. They claim they are not liable to Powergen and Powergen has no rights to terminate the contract. However, Powergen was ready to pay the damage but according to Vertex paying the penalties would not help in losing their reputation in the market.

Q6. What is the role of finance manager in making financial decisions?

Participant D: - Company could have taken lots of steps to avoid this failure, however that steps didn't take in place which lead to failure. The company could have improved their training, more concerned in selection of employees, change in technology and constant monitoring of system and call quality. The employees could have showed more responsibility towards company by resolving the problem rather than fake promises to the customers. Necessary action could have taken against dissatisfied calls could have made difference in the customer satisfaction (C-Sat).

Vertex could have seriously considered the complaints and steps to improve customer service. Employee selection could have been little bit difficult and could have been designed by keeping in mind the process requirement and level of service. Employee training could have been improved and in order to complete training employees could have gone through an assessment. Only those employees could have moved to next level those would be able to clear the assessment. This would have insured high level of customer service and increased customer satisfaction. Details process knowledge would stop hold time which some times annoying to the customers. Technology like Agent monitoring system, quality control and feedback system could have been changed. In order to get best out of the employees, giving feedback is the best technique. Continuous feedback to the employees about how they doing will make them aware their performance. Incentive system should be given to the employees who reach high quality, talk time and did not go beyond the hold time These steps would help the organization to improve their service level and good for their long term relationship with the clients.

Q7. What are the reasons behind the failure of financial decisions?

Participant B: - Well, that's the big question. There were lots of impact on the company performance, reputation in the market and market share. Vertex India Pvt. Ltd. lost their most of the employee's strength and because Powergen UK was the backbone of the company so there was huge decrease in the company's profitability. The worst thing happened because of the weak profitability half of the company processes have been taken over by the EXL Company which is another Outsourcing service provider. After the failure of the contract, Company was unable to establish their market and lost their reputation in the BPO market.

If the company losses its big business, it is obvious it adversely affect their reputation in the market. Vertex after discontinuation of the contract suffered from lots of problem. The company went on loss because of the main process was terminated. This weak profitability, employee's dissatisfaction, and bad reputation in the market directly affected the behaviour of other clients. The second biggest process in Vertex was Orange UK, a telecommunication company in the UK, after one year from the discontinuation of the contract Vertex lost its billing process for Orange UK but had customer service for them. The author has found out from the interviews that half of the Vertex Company had been taken over in 2007. The only reason behind that was loosing big clients and weak profitability.

Q8. Is it possible to calculate the profit or loss of an investment before you make that investment if yes then how?

Participant F: - If I would be the CEO of the company I would have taken the same step as Powergen has taken. If you see, the company wouldn't work with the company who is failed to achieve the targets set by the Outsourcing Company. There is lots of example of the companies in the BPO corporate world which are failed to achieve the tasks and the result is same as Vertex. So I wouldn't say the Powergen has taken the wrong step but they could have served the notice period before terminating the contract.

Here, the author tried to find out the general opinion from the managers of Vertex India Pvt. Ltd. about Powergen termination decision. According to most of the employees, Powergen decision was right. From their point of view, if the motive behind outsourcing is not successful, there is no point of keeping the contract and outsource their services. When Powergen UK was taken over by E-ON energy, in 2006 E-ON decided not to outsource their services to another service provider. E-ON has customer service call centre in the UK (Coventry).

Q.9. How investment decisions maximize shareholder's value?

Participant A: - There were lots of changes happened after the discontinuation of contract. Top level management reconsidered the entire quality and monitoring staff, I would rather say people with high performance were kept. All the security system, IT services, and mangers were changed. There was big change in the company from top level to lower level management.

Participant D: - Well, monitoring and quality after discontinuation of the contract was the prime concern because we lost the business because of lack of services. Moreover, employees were given feedback on weekly basis and targets were set for the employees. If the employees were not able to meet the targets then managers had to take necessary actions against that employee or employees.

Vertex India Pvt. Ltd. made lots of changes within the organization. The author has found from the research, almost all the staff and technology has been changed after that. They changed their all training staff, basically they gave contract to another company who provides trainer's to the organizations. Their job role was to provide excellent training to the employees which ensure high customer service to the customer. Moreover, they changed their selection process; selection procedure included eight rounds like introduction, aptitude test, listening test, free speech, and operations. Addition to that, quality was another concern; quality team started listening to random calls from the system rather barging calls from the employee station. New technologies were adopted after that, team manager were given a software were they can keep an eye on agent login status and other information. Despite of all, still Vertex could not do well and resulted loss of another process (Orange UK billing) and in 2007 50% of the company taken over by EXL which is another service provider.


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