9 Ways For Business To Use Finance To Make Informed Decisions
by Arina Smith Finance 20 January 2021
One of the achievements of decision-making is to remove the guesswork from the decision-making process. Financial policy-making is no longer dependent upon the mere intuition of business owners. Undeniable facts and accurate information must support your policies and validate the management’s decisions. Finance plays a critical role in an organization’s survival and development. That’s why your firm needs to develop financial literacy. Let’s see how it can be made possible.
Business Methods For Make Informed Decisions
Research suggests that decisions made instinctively are four times more prone to go wrong than informed decisions. Business owners must show extra care when these decisions are potentially critical and affect the company’s future. Unfortunately, human factors such as emotion and intuition still formulate 90% of business decisions today. That’s why American companies must religiously follow the GAAPs (generally-accepted accounting principles) to avoid financial difficulties. Let’s review some of them, shall we?
1. Implement a quick decision-making procedure:
First, you must define a procedure that works fine with important and recurring business decisions. This procedure will help you acquire the necessary information every time a critical project needs some fundraising. This process needs to get optimized for both major and minor operations. This process will further involve schemes to avoid risks and applying available resources. It will help if you reassess your current financial conditions to prevent the harmful consequences of your actions.
2. Hire financially-intelligent people:
Your team must contain financial specialists to provide advice regarding economic matters of importance. Also, it will help if you promote a communicative environment in the workplace. Many employees hesitate to speak because they feel there are restrictions against open-mindedness. Involve your finance department in decision-making procedures to reach an informed conclusion. Studies show that team-led decisions are 66% more accurate than individual ones. Employees who have acquired an online master’s in accounting degree can benefit you in decision-making. So, hire intelligently while finding ways to upgrade your team’s morale and efficiency.
3. Keep an eye out for financial threats:
No matter how fool-proof your decision-making procedure is, there’s always some risk factor involved. How to ensure you don’t take any wrong turns? Just keep an eye out for factors indicating you’ve probably made a mistake. There’ll be less or no cost savings every quarter; staff will make complaints about the supplier. Customers will be furious about delayed/canceled orders. Use your financial know-how to make informed decisions about solving these issues immediately.
4. Get and organize the correct information:
The next step for financial progress via informed decision-making is to acquire the necessary information. A study by Ohio State revealed that 90% of executives didn’t have critical information regarding their performance against competitors. You need to collect meaningful data – timely and accurate – before trying to make a financial decision. Try not to rely on inaccurate or incomplete information as it’ll pollute your decision-making. Use evidence-based management, and don’t blindly trust your instincts or gut feeling. Find objective evidence to support these feelings if you may. Also, make sure the data is fresh and double-checked.
5. Get financial advice from an external source:
There’s never a single source of information when we talk about proper and informed decision-making. It would help if you employed third-party assistance whenever there are critical decisions to make. Hiring outside help or consulting with financial analysts are praiseworthy actions. Simultaneously, getting a wide range of views to make your opinions more relaxed and realistic. Consult with your employees. Use performance evaluations, so they would speak up more often and share their ideas with you.
6. Create and maintain financial statements:
Let’s understand what financial statements are. We can divide them into three categories.
- Income statement: They describe your financial performance by checking your earnings.
- Balance sheet: They overwatch your financial health by stating what you owe and own.
- Cash management: They control your spending by managing cash inflow and outflow.
These “statements” are essential for a business as they correlate your decisions with your performance. Moreover, this technique is a combination of finance and accounting. Having an overview of your financial health and performance lets you make informed decisions about spending your cash. Such choices help you become more efficient with your commercial initiatives. Equipped with information, you can get prepared for critical business decisions in the future.
7. Manage A Budget And Then Stick To It:
Budget is at the core of every successful project. You can’t make informed decisions without learning how to create a budget properly. This budget will encompass all the resources you need to reach your objectives. Moreover, learn to differentiate between strategic and non-strategic expenses. The former enrich you directly by marketing your products via ads and salespeople. Cut non-strategies costs and focus more on the strategic ones for better productivity.
8. Manage And Control Your Pricing Model:
Startups often set their prices lesser than their competitors to target mode traffic to their brand. As the company starts growing, they gradually increase their prices. Financial experts believe that it’s fair to elevate your expenses once a year. But it would help if you collaborated with your subordinates to rethink the organization’s pricing model. Your costs and business rivals are the two factors you must consider before determining your fresh price-tags. Your finance department must have excellent ideas about how you can balance your profit and customers’ expectations simultaneously. Without financial literacy, such informed decision-making won’t be possible for business owners.
9. Tracking Your Financial Progress Via Kpis:
Finally, it’s time to reassess your financial conditions – as explained above – and evaluate your decision-making. You can’t modify your mistakes or revamp your policies without monitoring your financial performance. Here you’ll need to track your KPIs such as the working capital, net profit, ROI, and others. These metrics manage your firm’s cash flow while describing how your company makes and spends funds. It’s crucial to understand the organization’s overall financial stability.
Why do you think companies fall into bankruptcy? It happens when they fail to deliver while making financially-illiterate decisions. A 2018 McKinsey survey discovered that only 20% of organizations excelled at decision-making. You don’t want to repeat the same mistakes one-fifth of American companies made. That’s why you need to focus on making informed decisions and avoid taking steps instinctively. It is the quickest method to overcome the business challenges of the 21st century.