Decision Making

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The Business Advisor

MAKING DECISIONS

by Mary Hanson

One of the constants in running a business is decision making. In good and bad times, business decisions must be made every day. When things get tough, decision making can become very difficult.

There is often an emotional burden to making difficult decisions. Even relatively unemotional business managers can have a great deal of difficulty with the emotional toll. One of the most common consequences of the emotional burden is rushing to make a decision, good or bad. It can feel better to have made a bad decision (and to end the decision making process) than to continue the analysis necessary to good decision making.

In addition to rushing into a decision, the most common mistakes made with difficult decisions are:

- Failing to identify the objectives or outcome desired;

- Failing to obtain information (or failing to recognize the need for additional information);

- Relying on inadequate information (e.g., believing unsupported conclusions);

- Fixating on one desirable aspect or on one desirable possible outcome;

- Ignoring undesirable information;

- Failing to consider the long-term consequences as well as the short-term consequences;

- Failing to consider all dimensions of the decision (e.g., cash flow, as well as net worth, as well as personal satisfaction, as well as meeting family obligations);

- Failing to plan for different conditions (e.g., economic upturn and also economic downturn);

- Failing to recognize that the likely results of a decision are not consistent with stated objectives;

- Failing to consider different alternatives; and

- Failing to get advice from others (e.g., getting information on tax consequences from a tax advisor).

Techniques for Decision Making

Here are a number of techniques to improve the decision making process:

* Do your analysis in writing.

- Listing points to be considered makes it less likely that you will miss issues.

- Writing things down gets you away from emotional influences.

- Writing it down preserves your record for future reassessments.

- A written analysis can be used to get advice from others.

* Identify objectives or desired outcome or consequences. You must know what you wish to accomplish in order to make the best decisions.

* List alternatives.

- Don’t treat any decision as a “Yes” or “No” decision. There are ALWAYS other alternatives.

- List the pros and cons of each alternative. Consider not only financial pros and cons, but also the use of time, emotional impact, burden on others, the involvement of others, and likelihood of success.

- Note whether any alternatives are mutually exclusive or non-exclusive? Can you do TWO OR MORE of the alternatives? A common business or financial decision dilemma is that you cannot afford to do both A and B.

- Compare each alternative course of action on the same points. Be sure to consider the impact of different circumstances and both good luck and bad luck on each alternative. If some outcomes are unlikely or overwhelmingly likely, be certain to consider this “likelihood” factor in comparing different alternatives. Be sure to make any adjustments to assure that different alternatives are compared consistently.

* List additional information that might be gathered that would help assess any or all of the alternatives. Start gathering that information. Make a note of information that MUST be obtained before an appropriate decision can be made.

* Identify information that is unreliable and limit its influence on the decision making process. Confirm the information or develop your own information to replace the unreliable information.

* Prepare a detailed financial estimate for any financial decision. Convert any numbers provided by others into your own numbers based on your own calculations and verification. In business, any future number is probably an estimate. Any estimate ought to be 3 or 4 estimates, each based on different possible facts and circumstances.

- Identify all hidden, overlooked, and indirect expenses, such as level of effort, additional personnel, facilities, insurance, and advertising that will be needed to accomplish the desired goal.

- Use your sales, marketing, technical, and other advisors to get realistic numbers and actions for every alternative considered.

- Use the assistance of your financial advisor to prepare the projection, including taxes and estimated cash flow. Many businesses have failed because the growing business consumed cash flow and eventually bills could not be paid.

- Make your assessment and analysis based on both a good economy and a bad economy (or good luck and bad luck). Apply as many different circumstances and “what-ifs” as possible.

- A thorough financial analysis will often hand you an answer to your question. Good financial analysis can tell you where you are and where you are going with a very clear picture.

* Double check your work and continue to review it and add to it until you arrive at your final decision. If you change one part of your analysis, review the rest of your analysis to make sure related or affected factors are changed as necessary.

Many poor quality decisions are made because good decision making steps are simply ignored. Just forcing yourself to take proper steps in making a decision assures a BETTER decision.

The more thorough the analysis, the better the decision. The more thorough the analysis, the more comfortable the decision making process. An emotional burden can be reduced to zero when reliable numbers and good calculations show only one clear best course of action.

It can also be important to “think outside the box.” Remember that it may be best to “Just say ‘No’ ” and take none of the proposed courses of action. On the other hand, it is important to recognize that the “status quo” is a choice. Don’t make a bad choice of “status quo” just because you won't make the effort to make a better decision!

It is important to recognize when all the choices are “unacceptable” and to still apply good decision making processes. By applying the long term view, it might be easier to recognize the best of all the alternative “unacceptable” choices. By considering all the different consequences, or by preparing a thorough detailed financial analysis of the alternatives, one of the “unacceptable” choices may clearly be shown to be the least painful.

In some cases, where there is an emotional element, you actually know what to do, but really just need to determine how to implement the decision. Seeing the decision written down and supported by a thorough analysis may help you see how to take the steps you need to take to implement the course of action.

Avoid agonizing over decisions to be made. Avoid future regrets over decisions that turn out not to be the best. Avoid the discomfort of asking yourself “What was I thinking?” When you are facing important decisions, you owe it to yourself to do it right.

Difficult decisions are notorious for causing emotional trauma and sleepless nights. Good decision making steps can alleviate the emotional burden. Where there is a financial component to the decision making (as there almost always is, in business decisions), the numbers will often take you directly to an obvious answer, moving the entire burden of the decision away from you.

And as for sleepless nights, studies have shown that the quality of logical thinking is so poor in the sleeping hours that the time spent tossing and turning is a waste. Logical thought, needed for decision making, is not what the mind does well in the hours normally spent sleeping.

You can probably prove this to yourself, if it’s ever necessary, by writing down your thoughts in the middle of the night. In the morning, the jibberish written should persuade you of the hopelessness of effectively addressing important decisions during the night. If your scribbled notes seem to make some sense, remind yourself that you got yourself organized enough to get up and write, and that the written notes are probably the best by far of your sleep-depriving thoughts.