BUSF_A01.qxd

Business objectives

of making the decision. Also, the presence of irrelevant information can confuse deci-

sion makers, leading to sub-optimal decisions.

Step 4: Assess the data and reach a decision

This involves comparing the options by using the relevant data in such a way as to

identify those courses of action that will best work towards the achievement of the

objectives. Much of this book will be concerned with the ways in which assessment of

data relating to financial decisions should be carried out.

Step 5: Implement the decision

It is pointless taking time and trouble to make good decisions if no attempt is to be

made to ensure that action follows the decision. Such action is not restricted to what

is necessary to set the selected option into motion, but includes controlling it through

its life. Steps should be taken to ensure, or to try to ensure, that what was planned

actually happens.

Step 6: Monitor the effects of decisions

Good decision making requires that the effects of previous decisions are closely mon-

itored. There are broadly two reasons for this:

l It is valuable to assess the reliability of forecasts on which the decision was based.

If forecasts prove to be poor, then decision makers must ask themselves whether

reliability could be improved by using different techniques and bases. It is obvi-

ously too late to improve the decision already made and acted upon, but this practice

could improve the quality of future decisions.

l If a decision is proving to be a bad one for any reason, including unforeseeable

changes in the commercial environment, monitoring should reveal this so that some

modification might be considered that could improve matters. This is not to say that

the original decision can be reversed. Unfortunately we cannot alter the past, but

we can often take steps to limit the bad effects of a poor decision. For example,

suppose that a business makes a decision to buy a machine to manufacture plastic

ducks as wall decorations, for which it sees a profitable market for five years. One

year after buying the machine and launching the product, it is obvious that there is

little demand for plastic ducks. At that point it is not possible to decide not to enter

into the project a year earlier, but it is possible and may very well be desirable to

abandon production immediately to avoid throwing good money after bad.

In practice most of the monitoring of financial decisions is through the accounting

system, particularly the budgetary control routines.

2.2 Business objectives

What businesses are seeking to achieve, and therefore what investment and financing

decisions should try to promote, is a question central to business finance, and one that

has attracted considerable discussion as the subject has developed. We now review

some of the more obvious and popular suggestions and try to assess how well each of

them stands up to scrutiny.