IN THIS ARTICLE
→ What is an informed business decision?
→ What do you need to make an informed decision?
→ How do you make an informed decision in 20 seconds?
→ How do elite business owners make decisions?
→ What questions should you ask yourself to make an informed decision?
One of the biggest struggles business owners and leaders face is uncertainty in making important decisions.
It’s common to feel overwhelmed when faced with significant investments. If you’re spending a million dollars on a piece of machinery or equipment, or investing in a new sales manager where the recruitment fees and salary can quickly reach six figures, the stakes are undeniably high. And the pressure to make the right choice can lead to second-guessing yourself.
That’s why a phrase we often use is “making informed business decisions” – a structured, data-driven approach that removes this uncertainty.
An informed business decision is based on a comprehensive analysis and understanding of all financial and operational data, considers both immediate needs and long-term impacts, and balances risk and opportunity effectively.
Being well-informed means not relying on instinct or making snap judgments.
It involves a thorough examination of all the relevant information, including financial data, how your operations are running, and what the market landscape looks like. You take all this information into account to understand how a decision will impact your business both now and down the line.
There are two non-negotiables when it comes to informed decision-making.
The first essential component of making informed decisions is having access to solid data.
If you receive good financial and operational information on an ongoing basis, it means you’ve got a reference point as to what your business needs now and what it needs next.
Using the example of a large piece of machinery, the data can show the direct impact to your business of making that investment by looking at revenue and team productivity metrics. If you know purchasing that machine means your sales will increase by 40%, your capacity will increase by 35% and it will improve efficiency by 10%, that’s a clear-cut decision that will grow your business.
Being truly informed, though, is understanding what the risk is.
If you invested in that piece of machinery, what is the worst case scenario?
What would the equipment finance repayments due to your breakeven? What is your degree of confidence in meeting that breakeven? If you didn’t sell anything more but kept the machinery, what does your business look like then? What is the impact on your breakeven? What would happen to your overall financial position as a result of that investment?
When you understand the risk, that is an informed business decision.
The short answer is it could be anywhere from 20 seconds to 20 minutes.
The long answer is it depends on several factors, including:
If you work with an experienced and trusted adviser, an informed business decision might only take 20 seconds. That’s because all the information they have gathered over their time within a business gives them the context to say, "Yes, I believe we should move in this direction based on my underlying beliefs and assumptions and understandings of a certain situation."
So an informed decision is often created over a period of time.
To become an informed business decision maker, you need to be consistent and disciplined in your decision-making and information gathering approach.
This means being big-picture orientated and details-orientated.
Elite business owners we work with have the capability and the capacity to do both.
First, they can understand the high-level implications. They know how a large investment would impact their breakeven, and what could happen to their business long-term.
Second, they’re also conscious of the details behind any decision. As well as knowing the impact of an investment on their breakeven, they also understand the driving forces that influence that breakeven, like what would happen to their cost of goods sold or weekly wage bill.
Consider how any decision would impact your business by asking yourself questions such as these:
“A phrase you often hear me say is making an informed business decision.
What is an informed business decision?
An informed business decision should be relative to the timeframe and also relative to the size and the risk associated with the investment.
So firstly, informed business decision might be a 20-second decision, and that’s the result of all the information that you’ve gathered over your life or your time within a business to go,
“Yes, I believe we should move in this direction based on my underlying beliefs and assumptions and understandings of a certain situation.”
So that is an informed business decision that’s created over a period of time and can be made quite quickly – if there’s a very low degree of risk, as well it’s very easy to make a quick and firm decision.
Decisions then scale up. What about at the extreme end, a very large and significant investment for your business?
That might be a piece of machinery or equipment that costs over a million or hundreds of thousands of dollars. Or it might be an investment in a new sales manager, a new leader within your business, where the recruitment costs and the costs of the individual are in the hundreds of thousands of dollars.
What do you need to do to make an informed business decision?
Well, firstly, I always believe that if you are getting good financial and operational information on an ongoing basis, you should already be at around step eight of the decision-making process. What do I mean by that?
Well, if you are getting good financial and operational information, that means that you’ve got a reference point on an ongoing basis as to what your business needs now and what it needs next.
Let’s use that example of a large piece of machinery. What is the impact on your business of making that investment in the large piece of machinery?
Quite often, the piece of machinery working out – as in it’s a good investment – is a very easy calculation to make. You go, do you know what, sales are going to increase by 40%, it’s going to increase our capacity by 35%, we’re going to improve efficiency by 10%. We’re going to build and grow our business.
But the “informed” for me is understanding what the risk is. What is the worst case scenario that will happen?
That to me is a really informed business decision.
If we understand what is capable of happening with this investment, whether that’s a piece of machinery or a new person, that is part of being informed. Because you don’t want to invest $100,000 into something to only get $120,000.
But we then look at the risk side of things: If I make that investment in the piece of machinery, what do the equipment finance repayments due to my breakeven? What’s my degree of confidence in meeting that breakeven? What would happen if we didn’t sell anything more but keep this piece of machinery, what does my business look like? Same thing with a salesperson, same thing with opening a new operation in a different segment or a different region.
What is the impact on my breakeven? What would happen to my overall financial position as a result of this investment?
If you can understand the risk, I believe that is an informed business decision.
As I’ve referred to in previous videos, there have been times where we’ve worked with clients and they’ve made investments of over a million dollars in machinery, and we’ve made the decision in 15 minutes.
We don’t say that to be egotistical, but it’s because over a period of time we’ve gathered information in an organic and natural manner, which has actually made that decision - the cliched “no-brainer”. And in hindsight, sometimes it’s been “we should have bought two, not one”.
But the moral of the story? Be consistent and disciplined in your decision-making and information gathering approach, and from there you can become an informed business decision maker.
This sounds like you have to be high picture orientated and details orientated, and that is correct.
Elite business owners we work with have the capability and the capacity to do both. They can understand the big picture – i.e., what’s the impact on my breakeven and what’s my position of where the business could go and what’s the risk – but they also have to understand the details of what are the drivers that impact the breakeven, that impact the risk. What’s going to happen to my cost of goods sold? What’s going to happen to my weekly wage bill?
All those elements of detail, they’re just as conscious of those as the big picture and the overall objectives and risk of making these investments.”
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