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	The Business Advisor
	Making Decisions in Tough Times. by Mary Hanson

When things get tough, decision-making gets tougher. In 2004 I wrote an article on decision-making. Times weren’t as tough then as they are now. Here’s the updated “tough times” version of my advice on decision-making.

Decision-Making Mistakes

A key reason that decision-making can be so difficult is that we often suffer under the emotional burdens of feeling totally responsible for the outcome and fearing that things will end badly.

Using good decision-making techniques moves us away from emotional assumptions and fears.

Even where we are responsible, and where things might end badly, we have to make the best decisions we can make.

One of the most common consequences of the emotional burden is rushing to making a decision - good or bad. It can feel better to have made a (bad) decision (and have the decision-making process over with) than to do the homework necessary to make a good decision.

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

- Failing to fully identify the objectives or outcomes desired;

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

- Relying on inadequate information (e.g., making unsupported assumptions, relying on unsupported assertions of others);

- Fixating on one beneficial assumption or on one desirable possible outcome, rather than considering all possibilities;

- 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., available resources, funds needed, level of effort required, continuing need for additional funds, debt servicing burden, key personnel requirements, capability of personnel, tax consequences);

- Failing to plan for different conditions (e.g., improving economy, worsening economy, strong competitors, unavailable credit, high-cost credit, non-paying customers);

- Failing to critique or question the assumptions or conclusions of others;

- Failing to consider different alternatives (in addition to the proposals under discussion);

- Failing to recognize that continuing without any change is a choice (and often a poor one);

- Failing to consider the likelihood of different circumstances or outcomes; and

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

Here are a number of steps that are necessary for making good decisions:

Decision-Making Tips

(1) You must do your analysis in writing.

- Listing key points in the decision makes it less likely that you will miss issues. You can add to the list as you think of additional issues or challenges and capture much more of the relevant information.

- Writing things down gets you away from emotional influences or emotional tendencies to stew over the same points.

- Writing it down preserves your record for future reassessments. You can add information as it is obtained, and you can critique the written analysis later. You can make sure different parts of a complex plan do not conflict with one another. Assumptions can be challenged, and alternative fact situations can be added. For financial decisions different versions of a spreadsheet can be reproduced with different economic and financial assumptions. A written analysis can be preserved so that you can look back later and understand why you made certain choices.

- A written analysis can be reviewed by others. Information, alternatives, or additional issues provided by others can be added to the analysis.

(2) You must identify your objectives or desired outcome or consequences. You must know what you wish to accomplish in order to make the best decisions. Include your requirements and your limitations (e.g., state your limitations on the amount of money you can lose, the amount of effort you can provide, the minimum compensation you require, etc.).

(3) You must consider alternatives.

- Don’t treat any decision as a “Yes” or “No” decision. The best mindset is that there are ALWAYS alternatives.

- List all possible factors related to each alternative, not just key pros and cons. Consider financial requirements, cash flow projections, key risks, possible losses, time requirements, the need for key personnel, and resources needed. Strive to identify all factors that might be overlooked, such as indirect expenses, problems with facilities, insurance requirements, and marketing challenges.

- Note whether any alternatives are mutually exclusive. Can you do TWO OR MORE of the alternatives? A common business or financial dilemma is the financial inability to do both A and B. Choosing one course of action often eliminates other possible courses of action.

- Compare each alternative course of action on the same points. Be sure to consider the impact of different circumstances 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 you should obtain to help assess all of the alternatives. Note information that MUST be obtained before an appropriate decision can be made and do not make a final decision without it.

(4) You must gather the necessary information and do your homework.

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

- Prepare detailed financial projections 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 4 estimates, each based on different possible facts and circumstances.

- Use your marketing, technical, accounting, tax, and other advisors to get realistic numbers and information for every alternative considered. Seek help in estimating taxes and cash flow.

- Double check your work and continue to review it and add to it until you arrive at your final decision. Even then, continue to update and challenge your decision and your implementation of your decision. If you change one part of your analysis, review the rest of your analysis to make sure factors related to or affected by the change are modified as necessary.

- Never stop trying to improve your decision and your plans for implementation of your decision.

Simply forcing yourself to take proper steps in making a decision assures a BETTER decision.

The more thorough the analysis, the better the decision and the more comfortable the decision-making process. An emotional burden can be reduced to zero when reliable information shows what needs to be done.

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 don’t want to do your homework.

In tough times, sometimes all the choices are “unacceptable.” You still need to use good decision-making procedures, apply the long term view, and identify the best of the “unacceptable” alternatives. After doing your analysis, one of the “unacceptable” choices may clearly be the least painful.

In good times, a typical decision is whether or not to proceed with a plan to expand or to make a purchase. In today’s economic environment, many decisions are not simply “Should I do it or not?” Instead, common questions today are “What is going to happen in my business?” and “What changes should I make in my business?”

The use of risk analysis techniques can be helpful in making complex decisions. A key component of risk analysis is the use of percentages of “likelihood.” Classic risk analysis utilizes percentages by assigning a risk factor to certain circumstances or outcomes. For example, a plan may estimate that there is a 5% chance that a certain problem will occur. Percentages can be used in financial “what-if” analyses to give more weight or less weight to certain possible outcomes or circumstances.

One use of percentages that I recommend is forcing yourself to identify all possible outcomes with a percentage likelihood for each one, to a total of 100%. The goal is to avoid “blind spots” in decision-making. If a key issue is estimating your revenues for 2009, force yourself to assign a percentage likelihood to all scenarios. For example, you might assign a likelihood of 40% that revenues will remain the same as 2008. Then force yourself to identify where, in your opinion, the other 60% should be assigned.

If you feel there is only a 5% chance that economic conditions will become dire and seriously impact your business, you should still check to see how your plan works in such circumstances. By addressing all 100% of projected outcomes, your decisions are likely to be better no matter what happens.

A thorough written analysis can comfortably lead the way to the best decision. A good analysis has the ability to “hand you the answer.”

PUBLISHER’S NOTE

One of the important decisions being made by business owners, investors, and consumers in 2009 involves “deleveraging.” Many are choosing to pay down debt for a more comfortable financial situation. Others are paying off debt associated with leveraged investments. Others are seeing lines of credit reduced or new loans or lines of credit becoming too expensive. Some investors are being forced to pay down debt as the value of pledged assets has dropped.

If paying down debt is on your radar screen, be sure to review your plans with your tax advisor. The tax consequences of paying down a lot of debt in one year can be painful. The comfort from getting rid of some debt may be exceeded by the pain of unexpected tax consequences.

Mary Hanson

Attorney/Publisher