How do we undertake financial decision-making?
There are two parts to the decision making process. First, you need the right information. Do you have up to date financial data. Relying on last years, annual financial statements are of limited use if they are 18 months old. What has happened in the last 18 months? Have you the ability to obtain up to date financial information or do you need to update your tools. Is there a need for a software solution or a process change? Today there is software in the clouds. Funny term, but what it means is that the software is run over the internet. You can access it anywhere an internet connection is. The information is instant and current; provide you keep it up to date. Information is powerful.
Non-financial information should be used also. This includes reviews, promotional material, talking to others who use or have experienced the product or process. Seek out testimonials from raving fans of the product or process. If you are investing in shares or finance companies do you invest based on return alone? Smart money would say no.
Interpretation of the numbers is vitally important. Get an expert, perhaps a chartered accountant or a certified financial planner for investing advice to review what the numbers mean. Experienced people in this regard know what to look for and have experience to interpret what it means for you.
The second part of any decision making once you have the facts and numbers is to use your brain. By that, I mean:
B Benefits, what are they
R Risks, what are the risks involved
A Alternatives are there alternatives to buying this piece of equipment for example, lease, and buy in ready-made etc.
I Intuition, this is the gut feel. Does it feel right? Could you explain on national TV why it was a good idea?
N Nothing, doing nothing is a valid option.
Financial decision-making is all about good reliable information interpreted correctly and on a timely basis.
An example of financial decision-making can be what to do with your lotto winnings? After the initial excitement has worn off, perhaps after the new car, wardrobe and world trip, you decide to invest your money. Do you invest where your friends tell you? Do you invest in something with high returns? Remember high returns and high risk often travels together. Warren Buffet is the most successful sharemarket investor in the world (so far) and he always states it is important to understand what your money is being invested in. This applies to everything. Understanding is the key.
After you have gathered the necessary information, consulted a professional, considered the risks and alternatives, it feels right, then you have at least diligently followed a process to arrive at a decision that was right at the time.