Gut or Graphs? What’s the magic formula for investment decision-making?

We all know that making the right investments – whether in research, new products, technology, marketing and branding, acquisitions or physical assets is the difference between company success and failure.  And with product and technology lifecycles getting shorter and technology becoming ever more central to business, the pressure to do make the right investments will only increase.

Whenever I discuss investment decision-making with senior managers in IMI workshops, I get the same answers. SME owners often (slightly sheepishly) admit that they have no real formal process at all. Decisions are rarely subject to real financial analysis or risk assessment, leading to a hit or miss approach that can as easily break as make the company.

Decision Dice

At the opposite end of the spectrum middle managers in large companies frequently talk of being frustrated by bureaucratic systems involving incomprehensible formulas. They admit that they often resort to game tactics, learning to manipulate the numbers adroitly to meet the approval criteria, losing sight of the underlying dynamics risks of the decision.

So while some (mostly big) companies try to solve this challenge with complex spreadsheets, understood only by the initiated few, others (mostly small) companies bypass the analytical approach completely and end up relying entirely on gut instinct, owner “omniscience” and opportunism.

A magic formula to make the right investments every time is a Holy Grail for all companies. But does such a formula exist?

In my years working as a consultant and lecturer in finance I have had the chance to witness and work with companies all over the world – large and small – as they look to expand and grow.  And I’ve noticed three key characteristics amongst those who consistently make sound investment decisions..

Firstly, the single most important element in successful investment decision-making is in-depth understanding of your industry.  That means knowing your customer, competition, suppliers, and understanding where your sector is going as regards regulation, technology and major strategic dynamics is critical: this knowledge and understanding is a pre-requisite.

Secondly, an organisation can greatly improve the quality of its decisions by setting up good processes.  The right process for each organisation will depend upon a number of factors such as size and industry.  And while numbers may be part of the answer, great procedures are more about people, judgement and transparency.

Finally, both passion for what you are doing and what you are investing in can make a big difference to your ability to constantly update and build on your experience and understanding of the markets/types of businesses in which you are investing.

So in my experience understanding your market, good process and a genuine feeling for what you are investing in can swing the odds in your favour.

Of course many businesses as they begin to grow or venture into new investment areas are looking for guidelines on what to do and what not to do…  In my next post I’ll share some investment decision-making Do’s and Don’ts which might be useful when growing your own organisation.

Moira Creedon is a teacher and consultant in Strategic Finance and has worked with both corporate and public sector clients worldwide helping decision makers at strategic level to understand finance and improve their ability to formulate and implement strategy. She teaches on IMI’s Diploma in ManagementDiploma in Strategy and Innovation and Senior Executive Programme.

If you are interested in learning more about how to analyse and make investment decisions IMI see IMI’s Finance for the Non-Financial Manager and the Diploma in Business Finance.

Leave a Reply