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Elements of Decision Making in a Home Based Online Business 3

 

By Roy Thomsitt

Information You Need To Make Decisions

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.


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