DECISION MAKING PROCESS; WHAT EVERY ACCOUNTANT MUST KNOW ABOUT MAKING DECISION

Decision making process involves strategic planning and control activities. It is a universal fact that information produced by management accountants must be evaluated in the light of its final effect on the outcome of decision made based on it. And therefore presupposes that it is a necessary precedent for accountants to fully understand the decision making process if they are to perform the functions of management accountants effectively and efficiently.

Decision making process is a seven (7) stage process with two broad classification VIZ:- Planning process and control. The planning process phase of the decision making process is responsible for the first five stages of decision making process while the control process accounted for the last two stages of the decision making process.

DECISION MAKING MODEL/ DECISION MAKING STAGES

IDENTIFYING OBJECTIVES / IDENTIFYING GOALS

Goal identification is the first vital step of every meaningful project that has ever been executed by anybody. The identified objectives will guide the decision makers in the assessment of alternatives that will subsequently be identified.

Corporate goals identification has been a controversial topic which has generated so much heat; especially amongst the academia, for the purpose of this article, the objectives of a company or companies should be to do those things that will maximize the value of the company or entity, i.e. maximizing the wealth of the owners / shareholders.

The reason for this conclusion is that shareholders of a company are the residual owners of a company. By residual, I mean they only get anything if and only if all other stakeholders have been fully settled.

Other stakeholders include; creditors, government (through its various agents), employees, etc. so by aiming to create value for the shareholders, the needs of all these “preferential stakeholders” must have been met. A functional and bankable business plan can also be developed at this point, is a matter of choice.

THE SEARCH FOR ALTERNATIVE COURSES OF ACTION

Searching for alternative courses of action is the second stage of decision making process. These possible ranges of actions can also be called strategies. The aim of strategies is to enable a company achieve her corporate objectives as identified in stage one above.

There is never a comfort zone in business as many will think. If the management of a company decide to abandon research and development (R&D) and only concentrate on the already acquired market share and developed product line, the company’s competitive advantage will quickly erode. This will no doubt lead to the danger of not being able to generate adequate cash flows for the future survival and expansion of the business.

It is a good practice that management identifies potential investment opportunities and threats in its current environment and takes specific steps that will strategically position the company for any surprise. A company can do any of the following:-

  1. Develop new products to be sold in an already existing market,
  2. Develop new products to be sold in a newly indentified market; and
  3. Develop new market for products that has been in existence.

Acquisition of information concerning further business opportunities and business environment (local and global) is the heart of “search for alternative action”. This no doubt is the most difficult aspect of decision making process. However, it must be done somehow if a company is to survive.

GATHER DATA ABOUT ALTERNATIVES

After identifying alternative courses of action, management should assess these individual potential activities in the light of “state of nature”. State of nature simply means the real world full of uncertainties – e.g., inflation, economic crisis, economic boom, political influences, government policies, etc.

Assessment must be done bearing in mind the; potential growth rate, potential market share that can be established and the potential cash flows that can be expected from the alternative course of action. This stage of decision making model is very important because it is the aspect that simulates real life situation encountered by managements in making decision.

A firm should assess both the long-term implications and the short-term implications of whatever strategy it is about to adopt. Also, care should be taken not to commit economic resources to projects that will tie down resources for an unreasonably longtime. A balance must be sought between long-term investment and short-term investment. The reason for this is that every company that really want to survive needs to make both strategic decision and operating decisions.

An accountant should gather data for short and long term decisions like; estimated-realistic demands at alternative prices of our goods or services, what is the selling price of product A by our competitors, etc.

Gathering the above data and many more will allow management to decide which course of action will be more beneficial to the corporation.

SELECTION OF APPROPRIATE COURSE OF ACTION

At this point, managers use investment selection method of their choice to select any alternative that is deemed most suitable for the company in question i.e., good investment. If we are to still remain firm on our initial corporate objective of maximizing the current market value of existing shares, we will then use the NPV method of investment appraisal / capital budgeting to select any course of action that will create value for our shareholders.

COMPARE ACTUAL WITH PLANNED OUTCOMES

This is the first monitoring and control stage of the decision making process model. The manager needs to compare what it is with what it ought to be. An accountant measures observed results, compare it with the standard already in place and report to the management. This will then lead to the last stage of decision making process model if there is.

RESPOND TO DISCREPANCIES

Because decision making process is a sort of loop system that is largely based on feedback, management will need to get response from the end users of whatever the final product of the decision making process is and respond to discrepancies or improve on the level of satisfaction derived by the users of our products.

It should be noted that decision making process or decision making model is not and should not be based on financial and quantitative grounds alone. Some non-financial variables of business success factor needs to be considered as well.

Again, decision making process skills cannot be obtained from one article like this one you just finished reading. So, I encourage you to read other articles in this site and if you can, buy the Amazon books displayed below.

Comments

  1. Tan Tan Wayu says:

    You have very usefull quantity. It has helped me alot in my studies. Thanks so much.

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