Decision making in business

Decision-making is a vital part of the business world. Even a low-level supervisor makes several
decisions in a work day, and with some companies, decision-making is encouraged among
workers on the line. Unlike CEOs and managers of large companies, the small business owner is
largely responsible for the ultimate outcome of all decisions with regard to her company.
Decision-making involves the selection of a course of action from among two or more possible
alternatives in order to arrive at a solution for a given problem.

The business landscape of the current times is littered with examples of companies that have
made strategic errors and these are mostly to do with lack of proper decisions taken by the
CEO’s and managers in these firms. For instance, the failure of Chrysler and Ford (the
automobile majors in the United States) to meet the challenge of competition from Japanese auto
majors like Toyota was mostly due to the lack of imaginative decisions that would have
responded to the threat in a coherent manner. Of course, it is another matter that these companies
(Chrysler in particular) under the stewardship of Lee Iacocca were able to successfully meet the
competition by the Japanese because of firm decisions taken by him.

The other aspect that relates to decision making in an organizational context is that there must be
complete and accurate information made available to the decision maker. In Economics, there is
a term called “asymmetries of information” that indicates how incomplete and insufficient
information leads to poor decisions and wrong choices. What this concept means is that having
partial information or faulty information often leads to “analysis paralysis” which is another term
for poor decision making abilities. Finally, even with reliable and accurate information, the
decision maker ought to have good problem solving skills and astute decision making abilities to
arrive at sound judgments regarding the everyday problems and issues.

The overriding rule in decision making is that the decision maker ought to have legitimacy and
authority over the people who he or she is deciding upon. In other words, decision makers
succeed only when their decisions are honored and followed by the people or groups that the
decision impacts. The reason for mentioning this towards the end is that in many cases, the
fragmented nature of the organizations with different interests represented by factions often

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undermines the decision making capabilities of the decision maker. Hence, it is worth
mentioning that such authority must be vested with the decision maker.

Importance of decision making in business

Workforce Decisions: For a small business owner, each individual decision regarding the
workforce will have much more impact than on a large company. Long-term strategic decisions,
like increasing or cutting back the company's workforce, can make or break the company. In a
small business even individual hires can have an impact, as a good employee can increase
productivity and be good for staff chemistry, while a poor employee can do real damage.

Employee Input: Modern small businesses can benefit from the input of their employees in
decision making. Especially in small companies, input on decisions can improve morale.
However, someone along the chain of command must make the final decisions, whether by
herself or by committee. Having a process in place for making the final decision once all input is
collected is imperative.

Decisiveness Leads to Good Morale: Employees notice whether a boss makes tentative
decisions. If a supervisor is decisive about making her decisions, chances are she's decisive about
her whole approach to management, and the employees will respect that. Even a wrong decision,
made with conviction, often gets high marks from employees. Customers and stockholders also
notice how a manager makes decisions.

Decisions That Take Time: Some questions require more time for a decision. Generally, the
decisions that can't be undone without great cost -- in money or time -- need to be approached
slowly. A decision on whether to expand requires much research and consideration of
alternatives, and a later change of direction can be expensive.

Quick Decisions: Some decisions should be made quickly. Unfortunately, those are the ones that
some business owners may agonize over for days or weeks. If a decision can be changed or
undone without great cost, then it can be made quickly. The company can go broke while top
management oscillates between using one office supply company over another.

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Organizational control

Organizational control is the process of establishing and maintaining authority over and
throughout an enterprise. The organizational control process within a larger business typically
requires the use of systems that assist a manager in analyzing considerable amounts of data about
how the business and its employees are functioning in order to make appropriate administrative
decisions.

Types of Organizational Controls

Control can focus on events before, during, or after a process. For example, a local automobile
dealer can focus on activities before, during, or after sales of new cars. Careful inspection of new
cars and cautious selection of sales employees are ways to ensure high quality or profitable sales
even before those sales take place. Monitoring how salespeople act with customers is a control
during the sales task. Counting the number of new cars sold during the month and telephoning
buyers about their satisfaction with sales transactions are controls after sales have occurred.
These types of controls are formally called feedforward, concurrent, and feedback, respectively.

Feed forward controls, sometimes called preliminary or preventive controls, attempt to identify
and prevent deviations in the standards before they occur. Feedforward controls focus on human,
material, and financial resources within the organization. These controls are evident in the
selection and hiring of new employees. For example, organizations attempt to improve the
likelihood that employees will perform up to standards by identifying the necessary job skills and
by using tests and other screening devices to hire people with those skills.

Concurrent controls monitor ongoing employee activity to ensure consistency with quality
standards. These controls rely on performance standards, rules, and regulations for guiding
employee tasks and behaviors. Their purpose is to ensure that work activities produce the desired
results. As an example, many manufacturing operations include devices that measure whether the
items being produced meet quality standards. Employees monitor the measurements; if they see
that standards are not being met in some area, they make a correction themselves or let a
manager know that a problem is occurring.

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Feedback controls involve reviewing information to determine whether performance meets
established standards. For example, suppose that an organization establishes a goal of increasing
its profit by 12 percent next year. To ensure that this goal is reached, the organization must
monitor its profit on a monthly basis. After three months, if profit has increased by 3 percent,
management might assume that plans are going according to schedule.

Organizational Control Objectives

The six major purposes of controls are as follows:

Controls make plans effective. Managers need to measure progress, offer feedback, and direct
their teams if they want to succeed.

Controls make sure that organizational activities are consistent. Policies and procedures help
ensure that efforts are integrated.

Controls make organizations effective. Organizations need controls in place if they want to
achieve and accomplish their objectives.

Controls make organizations efficient. Efficiency probably depends more on controls than any
other management function.

Controls provide feedback on project status. Not only do they measure progress, but controls also
provide feedback to participants as well. Feedback influences behavior and is an essential
ingredient in the control process.

Controls aid in decision making. The ultimate purpose of controls is to help managers make
better decisions. Controls make managers aware of problems and give them information that is
necessary for decision making.

Many people assert that as the nature of organizations has changed, so must the nature of
management controls. New forms of organizations, such as self‐organizing organizations,
self‐managed teams, and network organizations, allow organizations to be more responsive and
adaptable in today's rapidly changing world. These forms also cultivate empowerment among
employees, much more so than the hierarchical organizations of the past.

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Long term sources of finance for a company

A constant flow of working capital is an intrinsic component of a successful business. This is

especially true considering the outflow that is a part and parcel of every cycle: salaries and wages
need to be paid; raw materials need to be purchased and equipment need to be serviced; funds
are needed for marketing, advertising, and other general overhead costs; reserves are required till
the customers make their payment. Working capital is truly the lifeline for any company.

The question arises as to how does a business acquire funds for working capital. There are two
types of financing: short term and long term.

Long-Term Financing

Relying purely on short-term funds to meet working capital needs is not always prudent,
especially for industries where the manufacture of the product itself takes a long time:
automobiles, aircraft, refrigerators, and computers. Such companies need their working capital to
last for a long time, and hence they have to think about long term financing.

Bank Loans

A traditional form of long-term financing is bank loans. These loans have stated terms regarding
loan amounts, interest rates and repayment length. Most bank loans are not altered once agreed
upon between a company and the bank.

Credit Lines

Credit lines are revolving loans that are available any time during business operations. Because
credit lines can have high interest rates, they are not the best long-term financing options.

Equity Financing

Equity financing is the issuance of stock by public companies to raise funds for business
investments. Companies must be careful not to issue too much stock, as this dilutes the value of
shareholders' equity and may lessen the chance for more public investment.

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Venture Capital

Venture capitalists offer personal loans to companies for a stated return percentage. These
individuals generally do not offer any services to the company other than cash for investment
purposes

Private Financing

Private financing is a loan option offered between a seller and a buyer. Large manufacturing
firms have finance departments capable of managing loans for large equipment purchases. An
example is Ford Motor Credit or Honda Finance, which hold and manage loans for companies
making fleet vehicle purchases.

Companies cannot rely only on limited sources for their working capital needs. They need to tap
multiple avenues. They also need to constantly evaluate what their needs are, through analysis of
financial statements and financial ratios, and choose their working capital channels judiciously.
This is an ongoing process, and different routes are appropriate at different points in time. The
trick is to choose the right alternative as per the situation.

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How working capital can be used as a source of finance

Working capital is the amount of cash a business can safely spend. It’s commonly defined as
current assets minus current liabilities. Usually working capital is calculated based on cash,
assets that can quickly be converted to cash (such as invoices from debtors), and expenses that
will be due within a year.

For example, if a business has £5,000 in the bank, a customer that owes them £4,000, an invoice
from a supplier payable for £2,000, and a VAT bill worth £4,000, its working capital would be
£3,000 (5,000 + 4,000) - (2,000 + 4,000).

Common types of working capital finance

Liquid cash

Working capital is seen as ‘working’ because the business can use it — in other words, it’s not
tied up in anything long-term. Whether you want to buy stock, invest in the business, or take on a
big contract, all of these activities require working capital — cash that’s quickly accessible.

On the other hand, if your business is profitable but has big bills to pay soon, your working
capital situation could be worse than it might seem — or could even be negative.

Working capital loans

Working capital loans are normally over a short or medium term, designed to boost cash in the
business to go after new opportunities. The size of the working capital loan you can get depends
on many facets of your business profile.

Overdrafts

Overdrafts have traditionally been a useful source of working capital finance for many
businesses across all sectors, but they're hard to get with a business bank these days. On the
alternative finance market there are lots of flexible business overdrafts, which are a great way to
finance working capital at short notice when you need it.

Revolving credit facilities

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Similar to overdrafts, revolving credit facilities give you a pre-approved source of funding that
you can use when you need. But the key difference is that with a revolving credit facility you
don't need a specific bank account with that provider — you can direct the money wherever you
need it.

Invoice finance

For businesses that offer credit terms to their customers, invoice finance is a common type of
working capital finance. Along with other types of receivables finance, invoice finance is based
on money owed to your business, and you normally get a percentage of the value owed via one
invoice or the entire debtor book.

Trade finance and supply chain finance

Trade finance and supply chain finance work in a similar way to invoice finance. They’re both
types of working capital financing designed for businesses that focus on physical stock rather
than services rendered. Supply chain finance is a mutually beneficial arrangement based on the
creditworthiness of buyers, where the buyer can delay payment for longer while the supplier gets
payment from the lender immediately (the payment delay is shouldered by the lender, rather than
the supplier).

Asset refinancing

If you can’t get enough funding via an unsecured business loan, you can often use assets in your
business to raise finance via an asset refinance.

Merchant cash advances

If your business accepts payment from customers using card terminals, a merchant cash advance
is another useful way to increase working capital. The product gets its name simply because it’s
a cash advance for merchants — meaning businesses like retailers, pubs, cafés and restaurants
are all suitable.

Tax bill and VAT funding

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If you've got a tax bill and it's putting a strain on your working capital, there is funding available
specifically designed for paying VAT or corporation tax. Getting a loan for your tax bill allows
you to spread the costs over 3-12 months, so you'll have a bit more cash available for other
things in your business.

Conclusion

There are many types of working capital financing available, and choosing the right product
depends on your sector and circumstances, as well as what you're trying to achieve. To find out
more about working capital financing, browse the related articles below or get in touch.

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References:

Adams, D. W., and D. A. Fitchett (2002). Informal Finance in Low Income Countries. Boulder,
CO: West view Press.

Anjali,K., (2005). Access to financial services in Brazil. Washington DC.: The World Bank.

Ferreira, M.A. and Vilela A. (2014). Why do Firms Hold Cash? Evidence from EMU

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