How to Make Better Business Decisions
Due to a technical issue there is no video, but this is the audio portion of my Facebook Live discussing How to 'Make Better Business Decisions.'
Entrepreneurs are famous for their gutsy intuition, and fast, bold business decisions.
It's exciting. It makes headlines.
And, nobody wants their wet-blanket accountant throwing cold water on their hot new adventure.
Yet . . .
Google did just that!
Google hired Ruth Porat, the "most powerful woman on Wall St.," to add data-driven analysis to their famous "moonshots." They considered their new Chief Financial Officer so important they spent $70 MILLION to bring her on board!
Analytical, data-driven decision processes aren't sexy - but they work.
If a cash-generating tech giant like Google needs analytical, data-driven decision-making, then it's doubly true for cash-sensitive small businesses.
Except small businesses can't just run out and hire a Ruth Porat to crunch numbers and run scenarios. So, why bother? "This new project is a no-brainer. I don't need to waste time contemplating other choices. Let's get going!"
There are four major ways "haste makes waste" when it comes to decision-making.
You overlook a better alternative
A good idea doesn't always make a good decision. A rushed decision can overlook alternatives that better fit your specific situation. Rarely is there just one course of action you can take.
Each new project, plan or proposal should strengthen and grow your business. Before you commit the assets you have worked so hard to build, take the time to weigh realistic alternatives.
Specifically, look for alternatives that could be a better fit in terms of time, money, and complexity.
Time - if a project takes too much time then it will likely never be fully put into action. Most small business owners have to find time for new projects in an already hectic schedule.
Money - if a project takes too much money it's likely to cause a cash flow crisis. Many projects have been scrapped midway because a company simply runs out of cash.
Complexity - if a project is too complicated it just might not be practical for a small business. In other words, consider the upkeep costs of your decisions. Don't overlook how much time and money the project will require in the future.
You overlook important facts
It can be really tempting to skip over boring details when you have a really strong "gut feeling" about something.
For instance, if a roulette table has landed on black five times in a row the crowd gets excited because they just "know" the ball will land on red next. The reality is each and every spin has a 47.37% chance of landing on red - less than a flip of a coin.
Crunching numbers and looking at the details can highlight facts that aren't obvious.
Most small business owners are usually knowledgeable about how their business has performed in the past. Accounting types call these "lagging indicators." But, because these indicators reflect the past, they can guide you down the wrong path.
For example - You wouldn't want to purchase a large supply of inventory that has had strong sales in the past, if its current sales have dramatically decreased.
Decisions that strengthen and grow your business need to be based on the future or leading indicators. And, yes, these are buried in the data.
Seek out specific data that will give you insights into what trends are currently developing, what is causing the trends, and how that affects your future business.
You overlook personal preference
The human brain is wired to decide on emotion then justify the decision with facts and logic. Everyone does it. It's literally our nature.
It's important to remember this when you are facing a business decision. Your current emotions can cause you to stray from your long-term goals. This is why we all keep making the same New Year's resolutions year after year.
A common example - buying a new vehicle vs. buying a used vehicle:
We all love a shiny new car. You slide into that stylish interior and breath in the new car smell. The engine purrs to life, and you're off. Cruising down the road with the sun gleaming off the pristine paint. It's all good.
Except the monthly payment is twice what a used car payment would be. Your insurance is a third more expensive. And, some inconsiderate cretin has just dinged your door.
Take some time to make an analytical, non-judgemental look at what emotions are influencing your choice. Make sure you are comfortable with what is motivating your decision before you commit to a plan of action.
No contingency plan
This definitely isn't the fun part of running a small business, but you must know what you will do if a project fails.
One of my accounting professors once told our class about a dairy business. I don't remember the name or when exactly it happened, but the story goes:
A successful dairy decided to change their production equipment. The new equipment used a rectangular shaped carton instead of the traditionally shaped milk jug. The would be able to ship more cartons for less money. They also decided to sell the old equipment for scrap to help pay for the new.
The only hiccup was customers didn't like the new cartons - they were too hard to reseal. Customers stopped buying, and because milk has a very short shelf life, the stores stopped ordering.
The diary hadn't planned for this catastrophic failure. They couldn't recover the old equipment. They couldn't afford replacement equipment. They were left with only one option - bankruptcy.
Now, this is an extreme example of "don't put all your eggs in one basket," but it drives home the need for a backup plan.
I hope you are ready to avoid these four "haste makes waste" pitfalls when you need to make your next decision.
So exactly how do I avoid them?
7 Steps to Make a Data Driven Decision
I have created a step-by-step worksheet that will take you through the process. This worksheet will help you make mindful choices and avoid regrettable mistakes.
1) Be clear on what you are deciding
Write down the core choice you are making. Ex - Should I buy a new laptop?
2) Be clear on what goal this decision is helping you achieve
Write down how this choice will strengthen and grow your business. Ex - I am buying a new laptop so my business can have quicker financial feedback by upgrading our accounting software.
3) List at least three viable options
List alternatives that could be a better fit in terms of time, money, and complexity. Ex - 1) buy a used laptop, 2) upgrade my current laptop, or 3) find a way to get the feedback from our existing software.
4) List the fundamental facts, information, or data you need to know
Be sure you are using forward-looking data and not assuming past trends will continue. Ex - What is the cost of each option? Will this computer and software benefit my business long enough to justify the cost? How long will it take for me to be efficient on the new equipment and software?
5) Consider any emotional attachments you have for each option (positive or negative)
Be very candid with yourself. ALL decisions have an element of how they make us feel or how other will see us involved. Just make sure those concerns don't override what's best for your long-term goals. Ex - I will look successful when I open my new laptop that has blah, blah new feature in front of my friends a the coffee house or this beat up old computer is too embarrassing.
6) Make a contingency plan
Your business has to stay up-and-running even if your worst-case scenario becomes reality. Ex - Lightning fries your computer two weeks before a tax deadline (yeah, that totally happened to me). You still get the work done in time because insurance replaces the server, and backups restore the data.
Put on your entrepreneurial hat, analyze your thoughts and data you've collected, and make the decision! You have gone through all six steps to keep from making a hasty decision, so don't overreact and fall into analysis paralysis. Make your decision.
If you want to grow your business you have to make the biggest impact with your available resources - your time and money. A solid data based decision process will help you do just that.
Are there past decisions you would've made differently if you'd had better information?
Is there a current decision you need to make?
I have created a one page PDF Decision Worksheet to help take you organize your decision process. Click below to download and tackle your next decision with confidence!