Decisions, they seem never ending, to what we wear each day, to what we eat each day, managers seem to have to make even more decisions than most of us. They resolve staff issues, decide on the rosters as well as some way hairier decisions. Some decisions are extremely important and have a lot riding on it, this decision can involve bulk capital and at the most extreme end of the scale it can have the future of the business riding on it. How do some even begin to make the decision when faced with hard choices, knowing full well that some people’s futures may be in your hands. Taking emotion out of it would be a good place to start would it not? As you would writing a statement, you’d take all emotion out of it and just stick to the facts that are in front of you.
8.1
Relevance plays such an important part in almost anything in life if it’s not relevant to you does it truly impact your day-to-day life. I can see here that a manager must decide what costs are relevant, irrelevant costs shouldn’t be considered when making a decision because if they are irrelevant, they won’t have any impact on the decision or outcome. Unlike in mean girls when “the limit does not exist”, in any business, there is a limit, and it does exist, whether that limit be time or money it doesn’t matter. You can’t decide to invest 6 million dollars in a project if you only have 2 million to invest, checking on limitations is important. All the same as you can’t commit to completing a project in a 6-month period if the job will take a minimum 12 months to complete. Moreover, managers need to consider the cost of their decisions, cost doesn’t always have to be monetary in value, it could be the possible decrease in reputation as well as many more things that could be considered a cost.
8.2
Contribution Margin (CM) = Sales (S) – Variable Costs (VC) – If at any point you have a negative CM if would be near impossible for the company to make money off the product. Given that the products variable costs are higher than the sales would mean that once you added the fixed costs to the product the margin of loss would be greater. I’ve been reading page 4 and I don’t really understand the whole idea of how focusing on contribution margins help make decision apart from the blatantly obvious, the margin is negative or not big enough, so we need to fix it. Maybe I’m on the wrong track here or is it truly just that simple? Page 5 offers a bit more clarification on the process that a business would follow regarding products with negative contribution margins, and then furthering onto page 6 it delves deeper into the further steps of consideration that would be and then onto the final product. It was quite interesting to read and see the thought process that should be implemented when considering products etc.
8.3
Long term decisions seem a bit scary, these usually involve a large amount of money/capital for an extended period. Once you’ve invested the capital you can’t exactly turn around and change your mind and withdraw your money like some sort of ATM. Once the investment has been made, seeing it to maturity is the only option, just like a marriage, for better or worse. Money has time value, from working in a small construction business I quickly found the reason that they would pay 30 days from EOM or sometimes even 60 days EOM was so that the interest could be made in the money in their bank during that time however the invoice never grew, just the money did. After reading the chapter though it says that this isn’t the case and it honestly confused me. What confuses me the most is that it mentions certain and uncertain, if a bank has promised you a 0.5% interest wouldn’t that make the value of the money in the future also certain? I am having no problems understanding the Accounting Rate of Return and the Payback period as I’d previously learnt that last semester doing business finance.
8.4
Discounting cash flows was also covered in the business finance subject that I covered last semester along with all the other items that were covered in this particular section of the readings. To further solidify it in my brain I did go back to my business finance textbook to have a look at those particular concepts.
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