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35.7 Using Financial Analysis for Decision Making

Overview​

Financial analysis for decision making uses financial data and analysis to support business decisions. Effective use of financial analysis helps make informed decisions, reduce risk, and improve business performance.

Decision Types​

Investment Decisions​

Investment Decisions:

  • Equipment purchases
  • Expansion decisions
  • New product/service decisions
  • Technology investments
  • Facility decisions

Operational Decisions​

Operational Decisions:

  • Pricing decisions
  • Cost management decisions
  • Staffing decisions
  • Inventory decisions
  • Process improvements

Strategic Decisions​

Strategic Decisions:

  • Business growth decisions
  • Market entry decisions
  • Partnership decisions
  • Exit decisions
  • Restructuring decisions

Analysis for Decisions​

Investment Analysis​

Investment Analysis:

  • Calculate return on investment
  • Assess payback period
  • Evaluate cash flow impact
  • Consider risk
  • Compare alternatives

Pricing Analysis​

Pricing Analysis:

  • Understand cost structure
  • Calculate break-even
  • Assess market pricing
  • Evaluate profitability
  • Consider competitive position

Cost-Benefit Analysis​

Cost-Benefit Analysis:

  • Identify costs
  • Identify benefits
  • Quantify where possible
  • Compare costs to benefits
  • Make decision

Decision Framework​

Decision Process​

Process:

  1. Define decision
  2. Gather financial data
  3. Perform analysis
  4. Evaluate alternatives
  5. Make decision
  6. Monitor results

Risk Consideration​

Risk Analysis:

  • Assess financial risks
  • Consider worst-case scenarios
  • Evaluate risk tolerance
  • Plan for contingencies
  • Make risk-adjusted decisions

Common Decisions​

Pricing Decisions​

Pricing Analysis:

  • Understand costs
  • Calculate break-even
  • Assess market conditions
  • Evaluate competition
  • Set appropriate price

Expansion Decisions​

Expansion Analysis:

  • Assess financial capacity
  • Evaluate return on investment
  • Consider cash flow impact
  • Assess risks
  • Plan financing

Cost Reduction Decisions​

Cost Analysis:

  • Identify cost reduction opportunities
  • Assess impact on operations
  • Evaluate savings
  • Consider risks
  • Implement carefully

Luxembourg Compliance Note​

Important Considerations:

  • Data accuracy: Use accurate financial data
  • PCN compliance: Analysis based on PCN-compliant data
  • Tax implications: Consider tax implications of decisions
  • Regulatory compliance: Ensure decisions comply with regulations
  • Documentation: Document analysis and decisions

Think It Through​

Artisan Boulangerie is considering purchasing a new oven for €15,000. The oven will increase production capacity by 30% and reduce energy costs by 20%. How should they analyze this decision?

Concepts in Practice​

Decision Making Example

TechLux Solutions expansion decision:

Decision: Hire additional employee (€50,000 annual cost)

Analysis:

  • Revenue impact: Additional employee can generate €80,000 revenue
  • Cost impact: €50,000 salary + €8,000 social charges = €58,000
  • Net benefit: €80,000 - €58,000 = €22,000
  • Return: 38% return on investment
  • Payback: Less than 1 year

Risk Assessment:

  • Revenue may be lower than estimated
  • Costs may be higher
  • Market conditions may change
  • Employee may not perform as expected

Decision: Proceed with hiring, but monitor closely and have contingency plan.

Result: Decision supported by financial analysis, risks considered, monitoring plan in place.