Business Environment, Capital Structure and Firm Profitability
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4250 Downloads I Published: 25 Jun ,2018
Business research topic is “Impact of business environment, capital structure and cost on the firm profitability”. In this regard detail study will be done on the factors like business environment, capital structure and cost that have impact on the firm profitability. In respect to this, suitable statistical tools will be used to discover relationship among the variables.
According to Prajogo, (2016) business environment is the factor that have a very high impact on the firm profitability and business performance. This is because business environment refers to the business conditions that firm is facing in current time period. Sometimes these business conditions are favorable and sometimes they are unfavorable. Both sort of conditions significantly affect the company. As if business environment is favorable then in that case performance of the company get improved. On other hand, if any sort of unfavorable change takes place in the business environment then in that case firm start making loss in its business. Thus, it can be said that business environment heavily affects the profitability of the firms.
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As per views of Belás and et.al., (2015) economic environment have a very huge impact on the firm performance. This is because economic environment refers to the economic condition of the nation that take specific shape due to variation in global economic conditions and nation economic as well as monetary policy. Thus, with slight negative change in these factors negative message gone to investors and at same time liquidity also positively or negatively get affected. This lead to availability of less amount of bank loan to the business firms. Thus, due to less cash in the business firm find it difficult to run its business smoothly without any problem. There is less amount of cash available for working capital finance in the business. It can be said that business growth rate get reduced with small negative change in the economic condition of the nation. Thus, out of all components of the business environment economic factor have a very high impact on the firm profitability.
Khan and Quaddus, (2015) claims that apart from economic environment political factor also greatly affect the business environment. This is because political environment refers to the political parties and their ideology as well as way in which they work for the nation. If political party is have development related thinking then nation grow at rapid pace or vice versa. It can be said that directly or indirectly political environment affects firm business performance. If there is a government that wants to develop a nation at fast pace then it will take business support decisions rapidly which makes a positive atmosphere in the nation. Such kind of government take a lots of steps to eliminate problems faced by the business firms. Thus, it can be said that political environment have impact on the firm profitability.
According to Georgescu and Popescul, (2015) political environment does not much impact on the firm profitability. This is because it is the business strategy that help firm in earning sufficient amount of profit in its business. Even political environment is not good firms under good leadership manage to grow their business. Thus, it cannot be assumed that political environment have a big impact on the revenue earning of the business firm.
As per views of Bah and Fang, (2015) legal environment and firm profitability are associated with each other. This is because it is the legal rules and regulations that determine whether firm culprit is or not for performing specific act. If there are strict rules and regulations then firm is held liable for its mistakes and such kind of things tarnish firm image among the customers. If such kind of incidents happened then firm profitability heavily get affected.
According to Faccio and Xu, (2015) capital structure have an impact on the company profitability. Capital structure refers to the combination of debt and equity in the capital structure. The debt and equity mix determine the finance cost for the business firm. Finance cost is the mix of interest and dividend which is the finance cost of bank loan and shares. If capital structure get imbalanced then in that case finance cost increased at rapid pace. This happened because either equity or bank loan can be increased excessively. If bank loan increased at rapid pace then burden of interest on the firm will be high. On other hand, if there is a heavy portion of equity in the capital structure then dividend payment liability will increased at rapid pace in the business firm. Thus, in both cases capital structure have an impact on the firm profitability.
As per views of Allen, Carletti and Marquez, (2015) capital structure does not having impact on the profitability. This is because percentage of finance cost as part of income statement always remain low. Hence, it can be said that there is no huge impact of finance cost on the firm profitability. However, there are some exceptional cases of the firms where debt in the business is so huge and lead to earning of low profit in the business. On this basis it cannot be assumed that finance cost have a heavy impact on the business performance.
Minsky, (2015) claims that finance cost seriously affects the firm performance when firm earn low amount of profit in its business. There may be a situation in which less amount of revenue is earned by the firm out of which operating and non-operating expenses are deducted. Further deduction of finance cost from profit amount lead to low or no profit in the business. Thus, it can be said that when low revenue is earned in the business finance cost negatively affect the firm. It is very important for the managers of the business firms to maintain balance in the capital structure. This is because if there will be balance in both then finance cost will be low in the business and firm will earn sufficient amount of profit in its business.
As per views of Schepens, (2016) in order to ensure that there will be a less burden of finance cost on the business firm standard debt equity ratio must be maintained. Standard debt equity ratio can be assumed at 0.5:0.5. This means that firm main target must be to keep debt and equity portion in capital structure 50%. If this percentage increased slightly then management must take steps in order to ensure that in upcoming time period this percentage will not increase again and everything will be in control. In this regard steps must be taken to ensure that sufficient amount of profit is earned in the business. If firm will earn huge amount of revenue then it can pay back debt and can bring down percentage and in this way balance can be maintained in the capital structure.
Kaplan and Atkinson, (2015) claims that cost is the one of the most important factor that have huge impact in the firm profitability. This happened because cost include both direct and indirect expenses. Direct cost is related to the production process. Whereas, indirect expenses are related to the non-core business activities. Both costs are summed up and deducted from the earned revenue. Thus, if cost increases at sharp rate relative to revenue than in that case profitability of the firm declined sharply. Thus, it can be said that business expenses affect the profitability of the business firm. It became very important for the firms to ensure that cost of production and non-operating expenses are in control in the business. In this regard, cost control methods must be followed in the business. There are number of cost control methods like just in time and economic order quantity that help business firms in substantially reducing the cost of production and non-operating expenses in the business.
According to Ederer, (2015) there is a very close connection between the cost and profitability of the business firms. Management must therefore every time must try to reduce cost in the business. It is usually considered that cost can be controlled by following a cost control methods but sometimes this assumption proved wrong. Due to economic uncertainty turmoil comes in existence in the market which lead to increase in cost of raw material. In such kind of situation cost control methods get failed and cost increase in business at rapid rate. Hence, it can be said that cost control methods are not hundred percent effective.
As per views of Nguyen and Le, (2015) there are many firms like Tesco that get failed in the business due to lack of control on cost. Sales price remain same but cost get increased which lead to reduction in the profit of the business firms. It was not possible for the mentioned firm to sale its product at reduced price because rivals were already selling products at low price. If Tesco will further reduce its product price then profit in the business will reduce. Thus, it can be said that firms must always try to reduce their production cost. This is because if same will not be done then profit in business will decline sharply.
The main aim of current research study is to identify the relationship that exist between the capital structure in term of finance cost, business environment and cost in relation to earning of profit in the business. In this regard some research questions are prepared which are given below.
These are the research questions whose answers will be discovered in order to derive results. Current research study aimed at finding out the relationship that is between capital structure in term of finance cost, business environment and cost in relation to earning of profit in the business. Thus, answers of these questions will help one in identifying the factor that heavily affect the profit of the business firm.
In the current research study sample of 30 respondents will be taken that have good knowledge of business management. All these sample units will be taken by using a simple random sampling method. This means that there will not be specific factors that will be considered while picking any individual as sample unit from population (Finkler and et.al., 2016). There are many other sampling methods like stratified and cluster sampling method. But same will not be used in the present research. This is because in the current research study there is no need take sample units by following certain parameters. Positivism philosophy will be used in the current research study because statistical tools like regression will be applied on the data set. In contrary to this, there is another philosophy that is commonly used by the researchers and it is known by name interpretivism. This philosophy is used when research study is nonscientific in nature (Research methods, 2013). Inductive approach will be followed in the present research because first of all literature review will be done which will develop broad understanding about research topic. Thereafter, data analysis will be done and on the basis of results theory will be prepared. Hence, interpretivism philosophy will be used in the current research study.
There are four stages in which project will be completed. First of all secondary data will be collected by the researcher. Thereafter, literature review or analysis of secondary data will be done in the current research report. In third stage primary data will be collected from the specific number of respondents and finally analysis of primary data will be done. At end research report will be prepared. In these five phases research work will be completed. Totally ten days’ time is required to collect secondary data. This is because it is very important to review sufficient number of literatures in order to develop sufficient understanding about research topic. It is very important to consider only reliable information in order to carry out present research work. If research will be based on unauthentic information then research may go in wrong direction. Hence, ten days’ time will be taken to collect secondary data. Two days’ time is needed for literature review. As it is important to understand each and every thing very carefully. Hence, in two days’ time period all collected facts and figures will be reviewed in systematic way. Primary data will be collected within 5 days. Five days’ time period will be sufficient because within this duration questionnaire can be easily received from the respondents. For analyzing primary data 2 days’ time is taken. This is because it is necessary to do data analysis in systematic way without making any mistake. Finally, after doing primary research, report will be prepared in 4 days. During this time period, detail description of literature review will be given and results as well as discussion section will be prepared in the report. On the basis of entire analysis conclusion and recommendation section will be prepared in the report.
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As part of research process first of all secondary data will be analyzed and then questionnaire will be distributed among the respondents in order to collect primary data. Collected data will be analyzed by using regression tools and in this way entire research work will be carried out.
As mentioned above secondary data will be collected from books and journals. Primary data will be collected by distributing questionnaire among sample units. Regression analysis will be used to explore relationship among the variables in term of level of significance, correlation and percentage change that happened in dependent variable due to change in independent variable (Mackey and Gass, 2015).
It is expected that proposed research study will reveal the extent to which business environment, capital structure in terms of finance cost and production cost affects the profit of the business firm. Research result will also reflect that which of these factors heavily affect the firm profitability.
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