Before making an important decision, most people consider qualitative and quantitative factors, as well as how both categories may interrelate down the road. Businesses also pay attention to financial and nonfinancial information before taking a competitive stand. In a modern economy in which commercial activities are hardly a linear set of experiences, corporate leadership must factor in the economics of each transaction but also the specific context for each business decision.
In the business environment, investors and regulators rely on various tools to gauge nonfinancial information. The arsenal available to these groups consists of two categories: internal and external. Internal information relates to such data as human resources management objectives, governance policies and management’s strategic vision. Corporate observers may use this organic information to identify effective internal controls, as well as to uncover improper and otherwise inappropriate business methods -- such as fraudulent or illegal activities. External information comes primarily from the marketplace and concerns everything from competitors’ moves and lending conditions to business legislation.
A company that does not publish accurate performance data may feel itself beset with forces asking for more transparency. Various groups, from shareholders to regulators and the public, may require that top management put into place sound procedures for financial-statement presentation and reporting. This increased interest in accounting statements comes from the fact that financial information is often key in decision making. A firm’s accounting data summaries are rich with information about solvency, profitability and liquidity. Examples include balance sheets, statements of cash flows and statements of profit and loss.
Nonfinancial information is as important as financial information in the decision-making process. Both pieces of data contain valuable insights that can yield interesting results if used correctly. To make a decision, businesses often rely on PDCA analysis or adopt specific steps. These include clearly defining the problem, evaluating potential alternatives, choosing the best option based on existing alternatives, monitoring implementation strategies and checking progress periodically. PDCA (plan, do, check, act) helps a company take a thorough look at its operating processes and come up with better ways to accomplish specific tasks and eliminate money-losing activities. Economists use the terms “PDCA,” “Deming wheel” and “Shewhart cycle” interchangeably.
Making proper decisions is the responsibility of corporate management, but department heads and segment chiefs also weigh in on decision making. This collaboration -- and the increased task delegation that ensues -- help senior leadership focus on major initiatives that will improve sales, trump rivals and enable the firm to control its patterns of growth. Rank-and-file personnel also contribute their insights in corporate decision making, working in tandem with segment chiefs to improve productivity.
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- NYU Stern School of Business; Financial Statement Analysis; Aswath Damodaran