Making top notch financial decisions is the goal of all good managers. Unlock these secrets to make a start on this process today.
Secret #1. Think Widely on Options to Solve the Problem
It is a waste of your time if you make decisions without canvassing ALL the options. How can the business be served well if you haven’t bothered to think of all the ways to solve your financial problem?
For example, if you are required to find a replacement for an aging computer system or factory plant item, what options would you think were available? What questions would you ask?
– Replace with a comparable item?
– Repair, upgrade, refurbish or maintain the current item?
– Purchase new/second-hand item with more capacity and increased output?
– Will the customers still be there for the outputs of the new equipment over its life?
– Will the company’s direction still provide a need for this asset over its life?
– What are competitors likely to be doing during the life of the asset?
– Will the cost of the new equipment price the product out of the market?
Secret #2. Think Outside the Box
Now that you have thought of good questions it’s time to apply some creative thinking processes to them in order to get the best answers.
There are many tools for creative thinking available. Just go to your favorite search engine and type in “creative thinking” for a host of suggestions. Some commonly used ones are:
– Plus Minus Interesting (PMI)
– “Six Thinking Hats”
– Lateral Thinking
– Random Input
Enter any of these into the search engine for an explanation of the terms.
Also you can also gain some real insights by listening to dissenters in your company or other outsiders. They may just have the key that will make your decisions a lot easier and generate more profits for the company. Do not forget to include their ideas.
These tools are designed to provide you with many answers to your questions
Secret #3. Gather ALL the Data,
In order to make a successful financial decision you will need as much data as you can use effectively. You will need to quantify the costs and benefits so that a rational decision can be made easily. The best way to do this is to convert them all to dollars. This will make it easier to assess competing options.
Some Costs to Consider:
– Installation of new equipment
– Removal of current equipment
– Downtime costs e.g. lost orders, increased stocking costs, extra labor to catch up with customer orders
– Training costs for new equipment
– New maintenance costs
– Capital costs
– Tendering costs, purchasing costs
– Initial transport costs
Some Benefits to Consider:
– Less wastage
– Less labor input
– Less resource inputs
– Increased safety
– Increased quality of life
– Faster customer response
– More accurate data
– Faster production times
– Less stock required
– Scrap/Trade-in Value at end of economic life
– Scrap/Trade-in Value of current equipment
Secret #4. Analyze the Data
Now that you have collected the data and have converted it to dollars, it’s time to evaluate each viable option using a systematic method.
There is a proven, tested method called Cost Benefit Analysis, which is the tool of choice for these kinds of decisions. It can be used effectively for asset replacement decisions as well as funding choices. Big business and governments around the world use it. The US government is a big user of this technique. In fact, it has legislated, federally, that this method be used when making decisions regarding funding to various major programs.
This method allows you to weigh up the relative costs and benefits of competing proposals, showing you which option is the most profitable, least costly or provides the greatest net benefit.
There are certain rules that need to be adhered to so that the final decision can be understood and acted upon. You can find the link to a site offering this proven method at the end of this article or in the Author Profile.
Secret #5. Make The Decision
Based on the Cost Benefit Analysis results produced above, there should be a clear answer as to the best way forward – provided all the processes were completed correctly.
You can be confident that this is the best financial decision, given the information at hand and the assumptions underlying the analysis.
Secret #6. Sell the Decision,
Once the decision is made it needs to be communicated, since others will need to know. Some groups who may need to know and be convinced that your decision is in their best interests are:
– Board members
– The press
– The owners
– Special interest groups
Since you used a tested, proven system to make the decision it makes it easier to convince these groups of the correctness of your decision – saving you time and effort.
Secret #7. Review the Decision
A year after the decision has been made, communicated to stakeholders and implemented it is time to go back and review the decision. This is often referred to as a Post Completion Review. Some areas of review are listed below:
– Assumptions – were they correct?
– Costs – did the actual costs of purchase, installation and operation equal the assumed costs in the proposal?
– Were there other costs involved that were not planned for originally?
– Benefits – did they eventuate? Were they in line with the initial assumptions?
– Were there any problems in implementation not foreseen in the proposal?
– Did the decision and implementation involve all the people who could add value?
Secret #8. Learn the Lessons
Once the questions above have answers there will be lessons that can be learned from the experience. Lessons such as:
– We need to include all of the costs next time – some critical ones were missed
– Some of the benefits did not eventuate – we were not careful enough to think through how these would be created
– Some critical staff members were left out of the decision-making process, but could have assisted to make the process less costly and run more smoothly
– The process of cost benefit analysis has taught us to think more critically about important financial decisions
Secret #9. Apply the Lessons
So that the errors or mistakes in this proposal are not transferred on to the next proposal, the lessons above need to be applied.
Some ways this can occur are as follows:
– Hold meetings at executive level where the Post Completion Reviews and the lessons learned are discussed.
– Use the company newsletter to discuss how future decisions will be conducted based on the lessons learned.
– Make senior managers accountable for their financial decisions; make part of their salary contingent upon their decision performance.
– Establish a company-wide culture of making good financial decisions using tools that can positively produce the best outcomes.
This is but a short summary of a very expansive topic. It is hoped that this article will provide a springboard for you to begin making better decisions – may be as early as today.
The financial decisions you make today can make a huge difference to your future life. The basis of a long-term sound economy is savings, regardless of whether it is in shares, mutual funds, or something else.
We help you get started, minimize your risks and maximize your return.
Make your next financial decision your best.