For any business, ranging from a sole proprietorship to a transnational conglomerate, decisions are the gateway to its success or failure. Therefore, the importance of informed decision-making cannot be emphasized enough in backdrop of sustaining and gaining competitive advantage.
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Informed decision-making as a function of financial knowledge
Informed decision-making is far beyond mere deliberation and brainstorming when it comes to battling competition and giving wings to your business. It entails a systematic process of reviewing the status quo, examining the change in the internal and external macro and micro environmental variables, assessing the response required in view thereof and eventually chalking out and articulating a well thought-out and calculated plan to capitalize on any opportunities and neutralize any threats arising out of the shift in the business environment, all of which requires a deep and thorough understanding of financial knowledge and the expertise to implement it for making sound, informed business decisions.
What do I need to know as an entrepreneur?
The nature of the business decisions made and, hence, the form of the financial knowledge and skills to be employed will depend on factors such as the scale of your business, the complexity of the transactions, the stakeholders involved, level of competitiveness and the vibrance of the environmental variables.
How I can leverage finance for making informed business decisions?
While finance is perceived as just a single term, confined only to financial data, it has multiple forms and manifestations, which individually or collectively are relevant to business decisions of varying nature. Below are some of the ways in which the different streams of finance serve as the fuel for informed business decisions.
Businesses in general and companies in particular prepare financial reports in one or the other form, a more formalized version of which is referred to as the financial statements. Meanwhile, public listed companies are mandated by financial regulatory bodies, such as The Securities and Exchange Commission (SEC) in the United States, to publish their annual reports on the prescribed forums, which includes the official website of the regulating body itself, among others. This report includes, among other information, company’s financial statements, key accounting ratios, audit, CSR and corporate governance compliance reports. An analysis of this information provides an insight into the direction in which the company is moving in terms of financial performance and indicates potential for future growth or degeneration.
Businesses in general and manufacturing concerns in particular prepare management reports, which despite being internal in nature, are a vital source of operational data, providing insight into the operational viability of a business’ products and services. An analysis of management information allows for the validation or invalidation of key strategic matters, including costing and pricing strategies. In addition, budgeting, forecasting and evaluation are fundamental tools for cost control and accountability.
Sustained growth hinges upon investment for the future. However, futile investments are a recipe for eroding competitive foothold. Financial management techniques such as investment appraisal allow for investment in projects with the highest rate of return and lowest level of risk. Methods used include computation of the return on investment, net present value and internal rate of return, among others. More advanced financial management techniques include bond valuation and modified internal rate of return.
This article provides just an overview of how finance performs as a function of informed decision-making. Finance is a highly technical subject and requires years of formal education and training before one can claim to be an expert and that only in a portion thereof. This is why the size of the finance team is directly proportionate to the size of the business and its composition defined by the complexity of the business operations.
If you are struggling with the growth of your business or are facing regulatory or compliance issues, you need financial advisory. Reach out to the experts at Expertise Accelerated.