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Do You Make These 10 Mistakes When Making Financial Decisions?

By: Bruce Hokin

Mistake #1. Not exploring all options.

It is human nature to want to think about the problem quickly, make a decision (instead of looking for the best decision) as soon as possible and move on.

There are many tools available to assist in thinking creatively to ensure all possible options are canvassed PRIOR to the decision being made.

For Example: If a decision is to be made regarding the company's business systems, close study would need to be given to ensure all feasible software providers were involved. Not only would you need to look at software providers but also hardware sources and bureau services. Also, will the future direction of the business mean that simply replacing “like with like” be suitable? Also is the ”do nothing” option viable?

Mistake #2. Not assessing the options correctly.

If you deal with Mistake #1 and generate many options, how are you going to know which options are worth pursuing? You need a recognised, tested and proven method to assess these options so that the best ones can be chosen for implementation.

Cost Benefit Analysis is the proven, accepted method use to make these choices. The Cost Benefit method is easy to understand and implement.

Cost Benefit Analysis is used around the world by big business and many governments when investment decisions and funding allocation questions need a resolution.

Cost Benefit Analysis provides a clear, unambiguous method that shows which proposal will provide the best Benefit Cost Ratio and should be funded (all other things being equal).

Mistake #3. Not funding the best option.

Once the best option is decided upon then you need the confidence to fund that decision. Cost Benefit Analysis models clearly outline the assumptions, the costs, benefits, and the method of adjusting for changes in purchasing power over time.

You can be confident in funding the decision if all the elements of the analysis are correct and agreed upon.

The final answer from the model is the Benefit Cost Ratio. Benefit Cost Ratios of greater than 1 also translate into increased shareholder value - a must for successful companies.

The opposite is also true. Benefit Cost Ratios of less than 1 will destroy shareholder value. You would not normally fund decisions with this result.

Mistake #4. Not standardising this method across the company.

There are many benefits to be gained by training appropriate staff and implementing this method across the company for all financial decisions. Some of these are listed below:
- Shortens decision-making time
- Reduces arguments in financial decision meetings
- Subjectivity is reduced
- Sign-off by responsible managers is made easier
- More time available for CEO to plan and direct

Mistake #5. Wasting time at meetings debating the method - not the proposal.

Since Cost Benefit Analysis provides clear assumptions, costs, benefits and a final answer, the time taken discussing the method is reduced. This is especially marked if this method is agreed across the company BEFORE it is used.

More time can then be applied to discussing the data and the assumptions, not the method, allowing managers to spend more time on other tasks.

Mistake #6. Using methods that do not include ALL Cost Benefit components.

There are certain elements to Cost Benefit Analysis that are critical to its success and confident decisions. These are listed below:
- Net Present Value
- Appropriate Discount Rates
- Clear explanation of assumptions
- Use of Benefit Cost Ratio
- Thinking widely on all options including “do nothing”
- Inclusion of non-financial benefits
- "Cradle to Grave” view of costs and benefits

If you are assessing other Cost Benefit texts or sites make sure all these items are included.

Mistake #7. Not selling the final decision appropriately.

Once the decision has been made to fund a particular proposal, it is important to sell this to the interested stakeholders. These stakeholders could be employees, unions, shareholders, the press, other executives, special interest groups or funding providers.

Selling a decision that used Cost Benefit principles is easier. The method is clear, tested, proven and easy to understand. This makes it more likely to be accepted.

Mistake #8. Not reviewing the decision once it is implemented.

The decision has been made and the proposal funded; it has been sold to the stakeholders and it has been implemented. It has been operating for at least a year. Now what?

It is time to review the decision, its implementation, the model's assumptions and the decision process. These aspects are made easier since all the critical aspects of the proposal were included in the initial deliberations.

This review can take into the following items to see if lessons can be learned so the same mistakes (if there are any) are not made on the next proposal:
- Did the proposed costs and benefits actually occur?
- Were the original model assumptions correct?
- Could the decision process be improved?
- Could others have assisted in the decision process?
- What lessons can we learn?

Mistake #9. Not learning from the past mistakes.

Had this method been implemented for past decisions then lessons learnt from past mistakes could be applied to the decisions at hand. It is important for the health of the business to implement these principles now - before other mistakes and sub-optimal decisions are made.

Mistake #10. Not training all potential decision-makers in the correct method.

It is important to ensure that all potential decision-makers are trained in the same method. It will only cause friction if these are differing ideas of the correct method.

I have found that it works best if the CEO can be convinced then he/she sells/directs it to the other decision-makers as the only way to present proposals in future.

Article Source: Main Articles

Bruce Hokin is an experienced accountant (FCPA). His main interests are in better decision-making and Cost Benefit Analysis training. You can find more of his in-depth FREE articles, a FREE Newsletter and FREE e-zines at his website. To sign up for his comprehensive, downloadable Cost Benefit Analysis training program just go to his website. You could be using this technique in under 2 hours!. All these benefits are available at www.thecostbenefitcoach.com

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