How to make sound financial decisions?

How to make sound financial decisions?

One of the aspirations of most investors is to obtain sufficient stability in the profitability of their investments, to achieve financial freedom.

No matter what are you start at, proper investment planning is the only way to achieve successful finances. Proper financial management will be the key to obtaining positive results and making your money grow.

Top financial advisers of Blue World City have shared their best financial advice. Throughout we will talk about the types of decisions, the factors involved, as well as tips and advice to help you find a financial balance.

Importance of financial decision making

Decision-making is a complex process that consists of evaluating the pros and cons of a situation related to money, which has a direct impact on all sectors of a company; In the case of being personal financial decisions, these impact on the survival and economy of the user.

The responsibility to decide correctly is one of the functions that a company manager or supervisor has, especially if it is your own business or venture.

Taking the company on the right path is of vital importance, for this reason all the influencing factors must be analyzed in detail before making a final

decision.

Types of financial decisions

The types of financial decisions can vary from time to time, that is, they are short, medium or long-term decisions, as well as choosing between one strategy or another.

Most of these decisions are related to capital investmentfinancing, dividends and operations. These will depend on the objectives set by the company.

The specialist Antonio Hernández classifies financial decisions into two general types: investment and financing decisions, however, other experts add two more classifications: operation and dividends or profits.

Below we will mention the main types of decisions in which the character and criteria of the financial administrator are put to the test.

1. Investment decisions

Finding opportunities that allow you to grow and obtain high profitability is necessary to be able to invest and make an accurate decision.

Of course, the purpose of an investment is to obtain financial benefits to ensure a stable economy and a relaxed retirement.

Then, investment decisions are those in which the destination of the available resources to acquire assets is questioned, with the aim of maintaining an optimal operation in the company.

The most important in this area are those of a strategic nature because they determine the size of the organization and the operation. And it should be clarified those different areas of the company intervene in decision-making.

Some examples of investment decisions are:

  • Credit sales strategies.
  • Growth and expansion plan of the company.
  • Levels of fixed and current assets.
  • Strategies for the acquisition of assets.

2. Financing decisions

Financing or financing decisions are those in which the best combination of sources to finance investments is questioned. These affect the financial structure of the company.

Another definition would be the way of acquiring resources taking into account the options to choose the one that is most convenient in terms of rates and payment terms, that is, with which it is worth acquiring a debt and with which it is not.

Some examples of financial decisions are:

  • Investments in equipment.
  • Invest in the money market or capital market.
  • Investments in working capital.
  • Investment with own or other people’s capital (loan).
  • Financing options.

3. Operation decisions

Operational decisions are those that refer to how efficient use of the resources available to the company is carried out. It is also necessary that several areas of the company participate to choose the options that provide the best results.

Here are some examples of operating decisions:

  • Target markets.
  • Price policies.
  • Service policies.
  • Volume of fixed assets.

4. Decisions on dividends or profits

Dividend decisions – or profits – are those that consider the dividends that will be distributed among the shareholders of the company. For this to be carried out correctly, the administrator must determine the following aspects:

  • The number of profits that will be distributed.
  • The strategy that will be used for the division of profits.

In some cases, when the cash is not enough, the alternative strategy for the distribution of profits must be determined, for example, distributing shares.

Factors that affect decision making

Now, once the types of financial decisions have been defined, we will talk about the factors that influence those decisions, and allow you to evaluate the degree of importance they have, in order to be able to quantify the variables and decide which one to use.

In the words of Peter Drucker, writer and consultant considered the father of management:

“Long-term planning is not about thinking about future decisions, but about the future of present decisions.”

In this lies the importance of making the right decisions, as these will affect the course of the company, leading to success or failure.

To learn more about the factors to assess the risks of an investment, we invite you to read the article we have prepared on this topic on our blog.

Below we summarize the multiple factors that can affect your decision making in two general classifications:

Internal factors

Internal factors are those that depend on the operation of the organization. Among the main ones are:

  • Strategy errors: when the chosen strategy was not accurate and affects the operation of the company.
  • Lack of liquidity: refers to the solvency of the company to meet its financial responsibilities.
  • Operational and occupational risks: these are the factors that harm productivity, and that result in loss of time, money and effort.
  • Financial flexibility: refers to the solvency capacity during periods of low or slow growth. For this to work, it is necessary to keep the company’s debt level low.
  • Commercial management: in order to reduce commercial risks, a perfect control must be carried out in the collection of invoices and maintain quality clients.

External factors

Now, external factors – as its name indicates – are those that are alien to the company, that is, it is the environment in which it interacts. Among the main ones are:

  • Systemic factors: refers to those caused by political events that can cause instability, an example of this would be Brexit or the pandemic caused by COVID-19.
  • Macroeconomic factors: encompass situations related to the country’s economy; for example, inflation, industrial production, Gross Domestic Product (GDP), unemployment rates, among others.
  • Market conditions: it is related to falling prices and low demand, as well as changes in technology or business models.
  • Credit: it is when changes and difficulties arise in accessing the services of financial institutions, such as an increase in interest or a rise in commissions.
  • Variants of interest rates: these are changes made by the country’s banking system in the interest rate, which affect the economy of companies.

Investment decisions to retire young

Taking into account what we have mentioned throughout this article, we will leave you some tips to make better financial decisions, in order to benefit the economic growth of your company or business.

1. Save and invest on time

Saving is always a safe bet, but not enough if you want to withdraw in the short term. As we mentioned at the beginning, it is possible to invest at any age, and among the main recommendations we have in this regard, it is the real estate sector that has shown that it is always a good time to invest in land.

It is important to include in our financial retirement plan the acquisition of assets that, in addition to generating profits, allow reinvestment in areas of opportunity.

The economic outlook for Mexico this year indicates that it is time to take forecasts, start saving, and invest a part of the savings in financial instruments or assets of proven profitability that do not depreciate easily.

After the approval of the Federation’s Expenditure Budget for Fiscal Year 2020, the International Monetary Fund expects that Mexico’s GDP will rebound 1.0% during 2021 and that it will maintain a stable growth rate in the coming years.

There are several options and strategies, but the infallible technique to save is to allocate a percentage of periodic income, independent of fixed expenses or expenses, for this objective.

The time is a factor in favor when it comes to getting extra income and preparing your retirement . The sooner it starts, the better.

Acquiring currencies or goods is a conservative option but more effective than keeping money in the bank and there are always options to invest according to age or profile.

2. Diversify your income

Diversifying is synonymous with expansion, growth, investment and openness. Having a single source of income is subjecting yourself to a single possibility of financial success. It is better to multiply our possibilities through various sources.

In addition, diversifying is the best way to reduce investment risk and is one of the strategies most used by companies to maintain stability in their assets. This is one of the strategies that large investors use when buying several plots of land.

There are several factors that intervene in the profitability of an asset or a financial instrument, so it is recommended to distribute the investments in several areas.

In fact, diversifying your income is one of the recommendations that we give you in our article, tips for investing and making the best decisions.

Some investment options that you can make are:

  • Purchase of real estate to later obtain an income from them.
  • Capitalize projects through the purchase of shares or financial instruments.
  • Start a new business.

3. Create a business

Among the possibilities of diversification, creating a company or business is a medium or long-term option that can represent a scalable source of income.

Entrepreneurship in Mexico has grown both with the young population and with that of adults of retirement age who start their first business after 40, 50 or 60 years.

Some of the most profitable options that can be explored in Mexico are:

  • Entertainment
  • Real estate
  • Consultancy
  • Education
  • Services
  • Franchises
  • Online business

The time or age of retirement is increasingly delayed in people who have their own business or company, since the desire to continue to see grow or manage what has been done throughout life persists but, if the necessary provisions have been made, a business can be the basis for an early withdrawal.

Starting a business by making the right decisions may be the key you need to retire young and enjoy your retirement years. There are many alternatives to undertake with a piece of land that you can carry out.

4. Invest in real estate

The real estate market has historically been a secure source of income for investors. It is only necessary to remember the advice of the grandparents: land and houses always go up in price.

In middle-income countries like Mexico, there is currently an explosion in the real estate market, just look at the Mexican southeast and its investment potential for 2021 to notice the growth in this area.

There is a predilection in emerging economies for the real estate sector over other sectors, due to its protection against inflation, its stability and its long-term appreciation.

The ideal is to have available capital to invest in properties that are viable and profitable in the long term, but there are also financing plans that allow any type of investor to start an equity or acquire a new real estate.

Investing in land, the best financial decision

You can’t be an expert on every topic, but you can get expert advice on every topic.

If you are interested in any type of financial instrument or market in particular, inform yourself and invest in advice with experts in the field is part of the investment.

In real estate business it is important to analyze factors such as capital gains and profitability of the area in which you plan to invest, and thus obtain results according to your investment plan.

At BMF Inversions we are committed to offering real estate investment projects that allow all investor profiles to maintain certainty of their assets.