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Decision-making is an essential management skill that can both drive and impede financial performance. According to research by management consulting firm McKinsey, organizations with fast and efficient decision-making processes are twice as likely to report financial returns of at least 20 percent as a result of recent decisions.
McKinsey’s research also shows that inefficient decision-making can lead to more than 530,000 days of lost working time and $250 million of wasted labor costs per year.
To help position your organization for success and avoid these pitfalls, it’s critical to develop your financial literacy and knowledge to understand and overcome business challenges.
Here are five ways you can use finance to improve your decision-making and become a better manager.
STRATEGIES TO MAKE BETTER FINANCIAL DECISIONS
1. Perform Financial Statement Analysis
Financial statements are among the most important resources at your disposal when it comes to decision-making. You should not only know how to read them, but interpret and analyze the data they present.
Understanding the numbers on your organization’s balance sheet can indicate its current financial position, and show whether it’s on a trajectory for success or failure. By examining its cash flow statement, you can gain insight into how cash is being generated and used. Through reviewing its income statement, you can gauge how your business is doing in relation to its expected performance.
When viewed in the context of an annual report, these statements can reveal valuable information about your company, such as its profits and losses year over year and the factors that have contributed to—or hindered—its growth.
Equipped with this information, you can make more informed decisions about how to allocate your company’s resources and work toward its goals.
2. Estimate the Financial Impact of Projects and Initiatives
To effectively manage your team and department, you need to decide which projects and initiatives are worth pursuing—and which are not.
Calculating the anticipated return on investment (ROI) of a project can help support your pitch with numbers and show how much profit it’s likely to generate and the resources needed to make it a success.
The ROI of completed initiatives can also reveal critical details about how your organization allocated funds and accomplished tasks, providing valuable lessons you can apply to future endeavors.
Conducting a cost-benefit analysis is another way you can use finance to make better decisions. This method of data-driven decision-making provides a framework for performing an evidence-based evaluation of an initiative, allowing you to assess how its projected benefits compare to its costs. With this approach, you can break down complex business decisions and elect to pursue projects expected to yield the best outcomes.
Financial statements are among the most important resources at your disposal when it comes to decision-making. You should not only know how to read them, but interpret and analyze the data they present.
Understanding the numbers on your organization’s balance sheet can indicate its current financial position, and show whether it’s on a trajectory for success or failure. By examining its cash flow statement, you can gain insight into how cash is being generated and used. Through reviewing its income statement, you can gauge how your business is doing in relation to its expected performance.
When viewed in the context of an annual report, these statements can reveal valuable information about your company, such as its profits and losses year over year and the factors that have contributed to—or hindered—its growth.
Equipped with this information, you can make more informed decisions about how to allocate your company’s resources and work toward its goals.
2. Estimate the Financial Impact of Projects and Initiatives
To effectively manage your team and department, you need to decide which projects and initiatives are worth pursuing—and which are not.
Calculating the anticipated return on investment (ROI) of a project can help support your pitch with numbers and show how much profit it’s likely to generate and the resources needed to make it a success.
The ROI of completed initiatives can also reveal critical details about how your organization allocated funds and accomplished tasks, providing valuable lessons you can apply to future endeavors.
Conducting a cost-benefit analysis is another way you can use finance to make better decisions. This method of data-driven decision-making provides a framework for performing an evidence-based evaluation of an initiative, allowing you to assess how its projected benefits compare to its costs. With this approach, you can break down complex business decisions and elect to pursue projects expected to yield the best outcomes.
3. Learn How to Budget
Budgeting is a basic finance skill all managers and decision-makers should have. At its core, your team’s budget is a vital tool that ensures your organization has the resources necessary to reach its goals.
By breaking down your team’s work into a detailed set of deliverables during the budgeting process, you can track your spending against estimated expenses and, when necessary, pivot your project management strategy to ensure tasks are completed on time and on budget.
Knowing how to manage a budget can also allow you to better communicate progress and performance to stakeholders within your organization, which can inform how company-wide initiatives are planned and executed.
4. Involve Your Team in Decision-Making
Soliciting and considering a range of alternatives is an essential step in the decision-making process. By involving your team in important business decisions, you can facilitate an in-depth evaluation of the issues at hand and stimulate more creative problem-solving. According to research by software company Cloverpop, teams make better decisions than individuals 66 percent of the time.
When addressing a financial decision, you can lean on your team members’ expertise to answer key questions and chart a path forward. One of your employees may be more versed in financial terminology, while another may have a greater understanding of the difference between GAAP and IFRS accounting standards.
By soliciting input from your colleagues and encouraging discussion and debate, you can fill in your knowledge gaps and formulate an array of potential solutions to business problems.
5. Track Financial Performance
Knowledge of your organization’s past and present financial performance is crucial to sound decision-making. Monitoring financial KPIs, or key performance indicators, such as gross profit margin, working capital, and return on equity can equip you with an understanding of your company’s financial health and your team’s contributions to its strategic objectives.
Metrics like cash flow and profit are also useful for tracking how your firm is managing money and growing, which can inform how you decide to appropriate people and resources to pursue its goals.
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