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12/05/2020 09:11:56 AM

Decision-making

Decision-making is the process of identifying and choosing alternatives based on the values, preferences and beliefs of the decision-maker. Every decision-making process produces a final choice, which may or may not prompt action.

Over time, many business and personal situations and crossroads arise that require a financial decision. In almost all of these instances, learning to focus on a small number of relevant-onlyfactors or line items will lead to fast, accurate, and smart decisions.

Typical business-related decisions include:

  • Pruducing or buying-in a manufacutured product
  • Adding or dropping a product or service line
  • Determining the best use of limited resources
  • Accepting or rejecting a one-time or unusual order/request
  • Keeping existing or purchasing new equipment
  • Selling as is or processing further

Typical personal-related decisions include:

  • Real estate investments
  • Vehicle purchasing
  • Retirement plan options and withdrawls
  • Other supplemental investment options
  • Vendor options for household products and services

The major skill required to become a consistently good financial decision-maker is simply to understand and master the meaning of relevance. Fast, accurate, and smart decisions will always result when relevant-only factors or line items are considered.

A line item is relevant:

•  If it is avoidable

•  If costs or revenues will  change (focus only on the change)

A line item is not relevant:

•  If it is unavoidable

•  If costs or revenues will not change

Line items that will not change and that are unavoidable are not relevant. Line items that are not relevant should almost never be included in financial decision-making.