How financial information supports a decision: three worked chains

1. Financial information supports a decision by narrowing the options rather than by choosing between them, and each figure points at a different kind of choice.
2. A gross profit margin that has slipped from 42% to 35% in a year means every £1 of sales now leaves 7p less to cover wages and rent, which points at a decision about price or supplier.
   1. Raising the price protects the margin but risks losing customers to a cheaper rival, while switching supplier protects it without touching the price and risks a drop in quality.
3. An average rate of return of 18% on a new oven against 6% on a second delivery van points £8,000 of spare cash at the oven, because each £1 invested there earns three times as much a year.
4. A cash-flow forecast showing a closing balance of -£3,200 in March points at arranging an overdraft in January, because a business still in credit negotiates from strength while one that has already bounced a payment to a supplier faces a higher rate or a refusal.

Qualitative information: why the numbers are never enough on their own

1. Qualitative information covers five things a decision usually turns on.
   1. Customer opinions and reviews: what people say about the product tells you whether last year's sales are likely to repeat.
   2. Staff morale: a team already working extra shifts may not absorb the large order the figures say is profitable.
   3. The reputation and ethics of a supplier: a firm caught underpaying its workers becomes your story too once a newspaper names the brands it supplies.
   4. The state of the market and what rivals are likely to do: if Aldi and Lidl cut prices across their narrow range, a small shop's forecast of steady sales stops being safe.
   5. The owner's own aims: an owner who started the business to stay in control will turn down an expansion the numbers support.
2. In the table below, a bakery choosing between three flour suppliers shows how the two kinds of information can point in opposite directions.
3. Supplier A is £1.50 a sack cheaper than Supplier B, which on 40 sacks a week is 40×£1.50×52=£3,12040 \times \pounds 1.50 \times 52 = \pounds 3{,}12040×£1.50×52=£3,120 saved in a year.
4. That saving buys a supplier whose deliveries are late almost three times in ten, so the bakery risks mornings with nothing to sell and a working conditions record that could cost it a wholesale contract.
5. Quantitative information tells you what is happening, qualitative information tells you why it is happening and what is likely to happen next, so a decision built on one of them alone is half made.

Judging whether to rely mainly on financial information

1. Financial information is objective and useful for comparing options, but historical figures may be out of date and forecasts depend on assumptions that may prove wrong.
2. The more important or irreversible the decision, the more the business should combine reliable recent figures with qualitative evidence such as customer views, staff capacity and supplier reputation.
3. Overall, financial information should set what the business can afford, while qualitative judgement helps choose between the realistic options.