There is no disputing the fact that to make decisions, you
need information. Without information, you are guessing in
a vacuum. If you guess instead of decide, you are reducing
your chances of success with your business.
Company Decision Making
A large company will probably have, or at least should have,
quite sophisticated management information systems. The systems
will be computerized, bringing information from all the key
areas of the business. The management team will have a process
for reviewing and monitoring that information, through the
circulation of summary reports, meetings (regular and ad hoc),
and other means of communication.
Those same sources of management information will be used
as a basis for important decision making. Past sales reports;
cost reports for different products, manufacturing processes,
and cost centres; market intelligence; material cost reports;
supplier reliability reports. Depending on what type of decision
is being made, some or all of these, plus more, may be taken
into account.
There is no doubt that such information should be crucial
to making key decisions in that business. However, some companies
fall into the trap of allowing the information system to become
an internal industry in itself, with no checks and balances.
If a company becomes complacent, if the whole process becomes
routine and habitual, then the value of those systems dissipates.
It turns the information systems themselves into a bottomless
pit for management time, bringing no valuable return.
Let me illustrate. In the early 1990’s, there was an
internationally known British company, which, like most companies,
had a budget setting process each year. That was an important
time for decisions; absolutely critical in one of the most
competitive markets in the world. That particular company
was near the top of the tree, if not at the top. It had won
a reputation for modernization, innovation, and efficiency,
in an industry bogged down by state intervention across the
world.
The whole budget setting process went on for many months before
the start of the financial year. Every manager of every department
was geared up for it, and it had become a highlight of management
activity. So how did they go about deciding the next year’s
budget for each department?
Across the board, in each department, their starting point
was the current year’s budget. Each manager would add
a bit here and there for anything new they needed to spend
money on. We’re talking many millions of pounds here.
Then the Finance Director and Chief Executive, as they went
through their budget setting meetings, would get individual
managers to knock off a bit to make the cost base look better.
So, they would end up with a budget very much like the last,
regardless of whether the last budget was nonsense.
One year the Chief Executive decided the whole system was
flawed. He threw out the system of “top down” budgeting,
and forced every department to start from zero. They now had
to justify every penny they spent to get their budget for
the year. Out went the complacency and blind acceptance of what
had been happening in the past. From then on, the management
were forced to justify what they were going to spend. Each
item of expenditure became a decision, rather than a habit.
Habits continue unless you “decide” to stop them.
Fewer habits and better decisions ultimately means higher profitability.
I can say with confidence that such examples of poor use of
management information systems is common. Often, too, users
of those systems come to accept them as gospel truth, when
in reality there may be errors in the figures or they may
include a lot of estimates. They may, on the face of it, appear
to be sophisticated, but under the surface they are often not.
Applying Company Lessons to Your Own Business
So, why have I spent so long writing about large companies
when you are probably just a one man band?
First and foremost, you will have an advantage over many others
if you are fully conscious of the fact that you are making
business decisions. I have given the illustration because
you are more likely to remember that than a whole load of
theory. It is a hook for your memory, which I hope may aid
you in remembering as you go through your business life:
“I need to make decisions based on good, accurate information,
and not let my decision making becoming a habit that skirts
the truth.”
It is amazing how differently you may view a situation given
hard facts, rather than just your memory and perception, mixed
in with emotion and mood. A few years ago my partner at the
time wanted to drop one of our magazine clients, because they
brought in only about $300 a month. It took only a few minutes
to change her mind. I worked out the income per hour from
that magazine, and out of the 7 magazines we handled, that
had by far the highest income per hour. That was a simple
decision, and one we were able to make because of a simple
part of a very basic information system – a record of
time spent on each client.
It is not possible, in a short article, to give a comprehensive
list of all the records you should keep, and how you should
use them, to aid your decision making. Whatever you do, do
not become over enamoured with any systems you set up to get
the information you need. You need accuracy and relevancy;
you need only the information necessary for the decisions you are likely
to need to make.
In your business, you know your cost base, markets, clients,
customers, suppliers and the way they interact within your
business. Think for a while what type of decisions you are
going to need to make, and then ensure you will always have
up to date and accurate information in order to make those
decisions. Here are a few closing tips:
Much of the information you will need will be of a financial
nature. When you set up your accounts for statutory purposes,
use a software package, like Quickbooks, that allows you
to break down figures into cost categories, products, markets
etc. For example, if you have a bill from an advertising
medium you have used for more than one product, ensure you
can input not just the total (for statutory purposes) but can then allocate
the costs to each product A, B and C etc. That will give
you a lot of information that can be summarized quickly
for decision making. Similarly with sales income or commissions.
A cheque from Clickbank may include several products; ensure
you break it down.
Try to master the use of spreadsheets. They can be used
for simulations or “what if?” scenarios in decision
making, and once set up can be very powerful assistants.
If you do use spreadsheets, ensure they are 100% right
before using them for decision making. Complex spreadsheets
in particular can harbour mistakes in formulae that have
not been immediately evident. If information is not accurate,
it is dangerous or worthless, usually both.
If you are spreading your time between separate sources
of income, try to keep a rough record of time spent on each.
As a sole proprietor with no staff, time can be particularly
critical; you only have a limited time each day to work,
you want to make the most of it.
Try to set aside some quiet time when there is a need
to make a significant decision of any sort. Think first
about the information you need to make a good decision,
and only when all that is in place should you “decide”.
That will help neutralize moods and emotions that may distort
your decisions.
If you have a decision to make, and find you do not have
the necessary information from your records, ask yourself
if you need to alter your own record keeping for future
decisions.
What I have aimed to do with this series of articles is
to increase your awareness of the need to separate business
from personal decision making. In your own business they
do overlap, but you will make better decisions if you not
only separate them, but treat them differently also.
I have also tried to encourage you to be aware of the need
to gather relevant information that you may require in the
future for making decisions. Often, being prepared right
at the beginning will make things a lot better for you later
on.
As your business grows, you may need to think about some
of the more sophisticated and statistical decision making
tools and techniques. I will not go into those here, just
ask you to remember the lesson from the British company
I mentioned earlier. Bigger is not always better. Accuracy
and relevancy are always better.
Roy Thomsitt is the owner, webmaster and author
of
http://www.change-direction.com , a website in about working
online in a home based business. He has a background in the
UK of offline advertising, with practical experience of working
from home in marketing since 1995, plus 2 years of experience
with online marketing.
