ISSN:
2181-3906
2023
International scientific journal
«MODERN SCIENCE АND RESEARCH»
VOLUME 2 / ISSUE 12 / UIF:8.2 / MODERNSCIENCE.UZ
877
FINANCIAL ELEMENTS OF BUSINESS STABILITY
Khalilov Bahromjon Bahodirovich
Asia International University, Bukhara
Lecturer of Department of “Economics”
https://doi.org/10.5281/zenodo.10406847
Abstract.
This article provides information on the financial elements of business
sustainability. Also, appropriate conclusions and suggestions are given about the work to be
carried out in the business.
Key words:
NPV, investments, resources, technology.
ФИНАНСОВЫЕ ЭЛЕМЕНТЫ СТАБИЛЬНОСТИ БИЗНЕСА
Аннотация.
В данной статье представлена информация о финансовых элементах
устойчивости бизнеса. Также даются соответствующие выводы и предложения по поводу
работы, которую предстоит провести в бизнесе.
Ключевые слова:
NPV, инвестиции, ресурсы, технологии.
Business organizations exist within the context of larger market economies where
conditions are always changing. By advocating a
strategic resilience
, which is achievable when
managers anticipate and adjust to changes that threaten a company’s core competencies. However,
our suggestions for developing strategic resilience contain little guidance for incorporating
financial decisions in the organization’s strategic deliberations. Despite this omission, financial
decision making is an important part of the process of making a business more resilient. In early
2021, a survey of 1,054 senior financial executives reported that 41 percent had an increase in their
responsibilities related to strategy business development in the past 18 months. Other areas with
significant increases included information technology, customer service, risk analysis, operations,
and human resources. Such expansion in responsibilities of these finance specialists attests to the
importance of considering financial elements in developing business resilience. This article
outlines recommendations for doing so through a systematic approach to financial decisions that
can positively impact strategic resilience.
An initial step for financial analysis is the quantitative evaluation of a firm’s investment
opportunities. But special care is required here. The traditional Net Present Value (NPV)
computations, first made popular by Dean, assume that once an investment is made, a manager
cannot revise the initial commitment of resources in order to change future cash flows. These
methods are still taught today, but they ignore flexibility. Many investments are not passive
investments that are unchangeable once committed. Managers can and do act after initial
investment commitments have been made to adjust the size and nature of cash flows when past
assumptions about future conditions prove incorrect. To reflect the market value of such potential
adjustments, Real Option Theory moves away from NPV’s assumption of a passive manager who
no longer acts once an investment decision is made, to that of active management that permits
managers to enact changes in resource commitments after initial investment is made. In this new
view, total NPV of an investment opportunity is seen as a sum of two components: 1. The NPV
with no revisions, plus 2. The NPV that is associated with possible revisions in commitments.
ISSN:
2181-3906
2023
International scientific journal
«MODERN SCIENCE АND RESEARCH»
VOLUME 2 / ISSUE 12 / UIF:8.2 / MODERNSCIENCE.UZ
878
Real Option Theory offers financial assessment of the flexibility that facilitates a
company’s strategic resilience capabilities. It provides a method to quantify the value of
managerial flexibility so that a manager’s real options can become part of NPV analyses. This
approach can be used for several different purposes. In any of its investment-decision applications,
Real Option Theory reflects the reality that managers are not passive, but are able to actively adjust
company operations as unforeseeable future conditions unfold.
Real Options Theory is not always as simple to use as computation-guided approaches,
such as traditional NPV. It invites subjective judgments as to what could happen instead of
focusing only on what is most likely to happen. Think, for example, of putting only enough
gasoline in an automobile to safely make a scheduled trip of 100 miles. A traditional NPV approach
buys the minimum amount of gasoline because less gasoline reduces investment cost without
jeopardizing the scheduled trip. Conversely, Real Options Theory leads management to consider
the value of putting an extra amount of gasoline in the automobile—based on the probability that
an unanticipated but potentially profitable side trip should be taken during the originally scheduled
100-mile trip. In other words, investing for just the scheduled 100-mile trip does not allow the
flexibility to seize an attractive—but unexpected—opportunity.
The value of this flexibility involves managerial judgments. The same holds true in
evaluating a threat, such as getting a flat tire—would you make this trip without a spare tire? A
strictly profit-maximizing approach may seek to reduce costs by recommending against
purchasing a spare tire. What is the value of having a spare tire? This is the kind of judgment
decision overlooked by traditional NPV calculations. A company might invest in a power plant
that can switch between natural gas and wood fiber in generating electricity so that future power
needs can be satisfied by whichever method is cheaper.
The initial cost of this switching flexibility might be high and so traditional capital
budgeting calculations might favor low-cost, less flexible alternatives. But, if the other side of low-
cost is an inability to cope with volatile fuel prices, then traditional methods give the wrong
answer. Real Option Theory is a better tool, one that values flexibility, and its proper application
will serve managers who desire to make their organizations more resilient to economic stress. Real
Option Theory, as understood by Brealey, Myers, and Allen, suggests that both the size of
individual investments and whether or not these investments can be altered over time matter in
terms of market value. Why? Because investments that are scalable permit decision makers to
follow initial successes with follow-on investments and to cut losses in the event of failure. This
scalability, in and of itself, creates value that cannot be seen with traditional capital budgeting
methods. Trigeorgis recognizes that decision makers using traditional capital budgeting tools are
not valuing their own ability to take an active role in managing economic resources into the future.
ISSN:
2181-3906
2023
International scientific journal
«MODERN SCIENCE АND RESEARCH»
VOLUME 2 / ISSUE 12 / UIF:8.2 / MODERNSCIENCE.UZ
879
Investments that are reversible also create value. The flexibility of a firm is directly related to the
degree that its investments are reversible. In any event, as a company takes steps to increase its
resilience, it should expect to be able to afford more inflexibility in some of its investments.
Strategic resilience comes at a cost, and managers may quickly find that its development places
constraints on profits. Much like with other core competencies or “competitive advantages” of a
company, resilience requires an investment to develop and maintain. Core competencies lead to a
company’s success in its markets, and benchmarking against the competencies of competitors may
mandate larger investments just to remain competitive. Even when financial analyses indicate that
investments into certain core competencies are not fiscally prudent, managers may choose to make
these investments because of strategic goals, such as staying at the forefront of some relevant
technology.
Every company needs to ask itself what level of financial resources should be held in
reserve? Different levels will be appropriate for different companies, and resilience may affect
profits in different ways. The costs of developing resilience may reduce profits; however,
resilience contributes to continued company survival. Choosing a specific level of a company’s
strategic resilience requires periodic judgments that balance its value against its costs. Such
judgments are further complicated by situations where resilience may actually increase profits by
allowing a company to seize unexpected opportunities.
When performing financial analyses, managers need to consider how all of the company’s
competencies can assist in their efforts. For example, a company may have a “captive buyer” for
whom the company is the only possible source for its vital inputs. This kind of company could
potentially pass cost increases along to its customers, thereby using its “marketing competency”
to maintain financial resilience.
Alternatively, for a company that cannot pass its cost increases along to customers, hedging
may be desirable. Hedging may reduce the future profits of a company, but it can allow this
company to offer stable prices to customers at a profit for the long-term. Some companies have
customers that expect stable prices, while others have customers that accept price fluctuations. For
example, a coffee shop may hedge its purchases of coffee because its patrons expect to pay
customary prices for standard sized cups. Conversely, a gasoline station operator might not hedge
gasoline purchases because customers are used to paying fluctuating gasoline prices.
The key is to leverage your strengths against economic uncertainty. Each company will
need to assess its core competencies and strategize as to how they can be best utilized in developing
ISSN:
2181-3906
2023
International scientific journal
«MODERN SCIENCE АND RESEARCH»
VOLUME 2 / ISSUE 12 / UIF:8.2 / MODERNSCIENCE.UZ
880
the ultimate core competency of resilience. As a company selects investments, decisions regarding
financing needs and capital structure can affect company resilience, and therefore require strategic
consideration. For example, resilience will decrease as financial leverage increases, because large
debts impose cash-flow burdens that reduce flexibility. This is especially troublesome for small
businesses because of their tendency to rely on debt financing.
There are other aspects of capital structuring that are often considered, but managers of
firms large and small should always remember that companies can increase their resilience by
reinvesting profits back into the firm. Such equity can be used to grow the firm or to pay back
borrowed money. Internal financing of growth avoids the possibility of immense debt burdens
arising when a new “star” product’s sales grow rapidly. Large debts can develop because a
company must usually pay for its production and distribution costs before the product can be
purchased by customers.
Customers may make matters worse if they further delay payment for their credit
purchases. Rather than acquire a huge debt burden for financing a high-potential product’s growth,
a small company may make a strategic decision to sell the star product to a larger company that
can more safely handle the financing.
As a company implements strategic plans, financial managers should be alert for
opportunities to use flexibility in the necessary operational activities. This is yet another tool to
improve or preserve profits throughout the business cycle. Brealey, Myers, and Allen note that
within the context of volatile product markets, the ability of a firm to alter the nature and quantity
of inputs and outputs in response to changing prices creates shareholder value. And this flexibility
works to create value to the degree that prices are volatile—the greater the volatility in prices for
inputs and/or outputs, the more valuable flexible production methods become.
This flexibility can serve to offset some of the harm done when sales volumes are reduced.
C.K. Prahalad has studied companies in India that are able to deal with highly volatile business
conditions by using “strategic clarity and consistency” to guide “agility and resilience in
operations.” He identifies companies that are able to succeed at 30 percent to 40 percent capacity
utilization, noting that agility in changing operational activities is vital to resilience.
Any organization that possesses a core competency can succeed during times of economic
prosperity. Only those that are resilient can survive economic change. Flexible organizations are
able to adjust to economic fluctuations while keeping these core competencies intact. This
flexibility must extend to the company’s capital investment policy.
Managers who employ Real Option Theory can evaluate capital investment opportunities
in terms of their flexibility, favoring capital commitments that do not put the future of the
organization in jeopardy. This approach, followed by the aforementioned steps, will help optimize
a company’s resilience through its financial decision-making processes. Traditional capital
budgeting methods will not help managers to do this work.
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