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Decision Support Service
Making Easier And Faster Decisions
"Again and again, the impossible problem is solved when we see that the problem is only a tough decision waiting to be made" (Robert H. Schuller)
Our decision support service is for directors who want to take the big decisions with more confidence.
Nothing seems to define senior management better than having the responsibility and authority to make the big decisions that have a major impact on the company's future and financial well-being.
For the Managing Director/Business Owner the "buck really stops here" and there are few lonelier positions than being the boss who's got to make some tough decisions. It's very common to want to bounce these issues off someone who you trust to act in your best interests but it can become a big problem if you don't have anyone suitable.
It's Only Some Decisions That Are The Problem
Everybody makes some decisions every day and they don't cause problems. Many decisions are mundane.
Even in business there are routine decisions that can be easily delegated to staff or even automated by computers given a few simple rules - these are decisions like re-ordering stock when it falls below a particular level.
The tough decisions are the one-off situations where there is a particular problem to solve and where the costs, consequences and risks are uncertain.
Too often as a business owner, you're forced to make important decisions when you don't have the information that you need. It's like driving in thick fog - is it better to carry on and hope that you don't run into anything and that the fog clears around the next corner or is it better to stop (wherever you are) and to be run into?
It seems sensible that the more information you can feed into the decision making process then the better the resulting decision is likely to be.
The rational decision making process
The text book approach to decision making is very logical and has a number of steps:
- Recognise that a problem or opportunity exists.
- Search for all the alternative options.
- Evaluate each alternative in terms of costs and benefits .
- Select the preferred option and implement it.
But real life's not that simple. It can be difficult to spot the problem. And you know that finding all the options and then evaluating them all is going to be far too time consuming and expensive, even if all the information is available in the first place.
Instead we have to do the best we can and hope that our best is good enough. That's where our decision support service comes in.
A Practical Solution
We help you when you need to make important decisions in three main ways:
- We provide an independent objective view of the problem, its symptoms and its possible causes.
- We can help clarify the risks involved and the consequences of particular choices.
- We can provide the financial evaluation necessary to make an informed decision by building a financial model. Of course the calculations are going to rely on decisions about assumptions but just the process of trying "what-if this" or "what-if that" helps bring the issues into focus.
Let's look at a couple of typical business decisions and see how financial analysis can help you make a better decision.
Example 1
Your salesman comes to you with an exciting proposal. He explains that he's being doing some research with the customers and he's confident that he can increase sales volumes by 50% if you agree to a price reduction on all their purchases of 10%, pay advertising and promotion support of £40,000 and give them an extra two weeks credit.
We'll assume your business currently has sales of £2 million, earns a 30% margin and has overheads of £500,000 producing a profit of £100,000 per annum.
Do you agree to the proposal?
We'll have a look at the financial evaluation:
|
Original |
Effect of Reducing Prices |
Effect of Extra Volume |
Advertising & Promotion |
Revised |
|
£000 |
£000 |
£000 |
£000 |
£000 |
| Sales |
2,000 |
(200) |
900 |
- |
2,700 |
| Cost of Sales |
(1,400) |
- |
(700) |
- |
(2,100) |
| Margin |
600 |
(200) |
200 |
- |
600 |
| Overheads |
(500) |
- |
- |
(40) |
(540) |
| Profit |
100 |
(200) |
200 |
(40) |
60 |
Reducing the price on existing business by 10% is going to cost £200,000 (£2 million x 10%).
The extra volume is at lower prices - the 50% increase would have been worth £1 million before the 10% price cut so it becomes £900,000 at the proposed prices.
Looking at the results I hope you agree that the salesman's proposal has to be turned down unless it can be improved. But what do you decide if the advertising costs could be dropped and the price cut shaved back to 9%? What about the financial effects on cash flow of the increase in credit and the extra cash needed to support the debtors and stock of a larger business?
Example 2
Your production manager comes to you with a proposal to replace the machines that keeping breaking down and are causing serious customer service problems because deliveries are late. These machines cost £100,000 four years ago and can be sold for £20,000 now although they are in the books at £60,000.
The new machine is going to cost £70,000 and should save the business at least £25,000 per year in maintenance costs, lower overtime and emergency deliveries and reduce the number of customer complaints.
Do you buy the new machine? Do you sell the old ones?
Again let's have a look at the financial evaluation.
The easiest way to assess this investment is using the payback method - how long does it take to get your money back after it's been paid out?
In this case the investment is £70,000 and the savings are £25,000 per annum - this gives a payback period of 33.6 months (70,000/25,000x12).
That's not bad and the investment looks good. But before you place the order for the machine, does the business have enough cash? And even if the company has the money are there any other better options? If by taking this option you have to give up on another one that would generate cost savings of £50,000 per year then it's probably better to turn it down.
What if you could find a sub-contractor who'd do the machining for you? Is it cheaper to make or buy?
Decision Support Services
As you can see what starts off as a relatively simple decision becomes more difficult as you consider extra options. That's where our decision support service gives you the assistance you need.
We help identify the extra options and help you evaluate the alternatives but we won't make the decision for you. It's your company and you make the decisions. But we will give you the support you need so that you have a better chance of making the decision that's right for you and your company - the one
that fits in with your goals.
Register of Virtual or Part Time Finance Directors
If you are based outside of the Midlands and you want to know more about decision support, financial modelling and risk assessment you could benefit by contacting one of the part time Finance Directors on the register.
Each is a qualified accountant who now works with small and medium sized businesses after a senior management career in industry and commerce.
Are you making some of the common mistakes that could be holding back your business and costing you thousands of pounds in lost profit - find out here business owners, marketing, sales, employees or finance.
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Last updated on 2007-07-04
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