We make decisions daily, but most of them aren’t great.

Some are inconsequential and don’t matter. But how do we know when they do?

Today we’ll talk about:

1. 3 decision types
2. Creating natural decision points (triggers)

to help you improve your decision quality and ultimately your business outcomes.

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HOW TO TURN FINANCIAL DATA INTO BETTER DECISIONS

In the last newsletter, we talked about the proper meeting structure. And while the right structure will facilitate better decisions, there is always the question: but when is the right time to make a decision? We want to avoid both overreaction and under-reaction, but how do we know we’re doing that?

To do this, we have to:

1. Understand there are different types of decision and which decision type we’re facing
2. Pre-define our action points

If you’ve ever felt like your business is stuck in firefighting mode, you’re not alone.

It’s easy to spend all your time putting out daily fires (handling invoices, managing employees, and keeping customers happy) and miss the bigger financial decisions.

But the problem is you’re reacting instead of planning. And it’s time for a shift. Your business is a culmination of all your decisions and the quality of those decisions. So, by establishing the right frameworks, we can know which decision to focus on, when to act, or how to respond.

It’s answering questions like:

• Are you setting aside enough cash for the next downturn?
• Do you know when it’s time to stop spending—or when to double down on growth?
• What early warning signs are telling you your business is changing?

Today we’re going to talk about:

1. 3 types of financial decisions
2. Creating financial triggers/decision points

Then next week we’ll talk about creating an action plan after that trigger/decision point.

Let’s dig in.

THREE TYPES OF FINANCIAL DECISIONS

We all know there are different types of decisions in business.

Some naturally happen on the fly (firing an employee, calling a customer for payment, or adjusting pricing). Others require long-term thinking (hiring, expansion, or acquiring another business). And some are addressing hidden risks within the business (cash and debt management).

These three types of decisions can be labeled as:

1. Operational
2. Strategic
3. Risk Management

Operational decisions are the decisions that are made daily. What proposal are you submitting to the potential lead? Do you push that customer for their payment or hope that more cash comes the next day? Do you fire that employee or just write them up?

Most of these decisions are forgotten or don’t matter even a week later, but some will have long term impact. Either way, they’re being made on the fly in the course of the business and required for the business to run smoothly.

Strategic decisions are focused on the long-term goals of the business and made in light of that vision. It’s the decision on whether to hire, offer new services, acquire another business, or anything else that rises to the year or multi-year planning phase.

The reality is, we all make these decisions, whether we plan for them or not. The ones that don’t plan are just treating them like operational decisions, which will backfire over time. At some point you reach the limits of your potential and the growth stops.

By identifying these types and giving them time, we can ensure we don’t reach those limits.

Risk management decisions are focused on avoiding avoidable risks that will prevent you from reaching your long-term goals. They work in concert with your strategic decisions because your risk tolerance is often informed by those long-term goals.

These decisions are asking:

• How much cash should we set aside for emergencies?
• How much debt can we safely take on and when should we refinance or restructure our debt?
• What policies will we put in place to protect us from rogue employees?
• What customer risks (concentrations, types of business, etc) are we willing to accept?
• Are we okay with one key supplier or should we diversify?

The focus of risk management decisions is on protecting the business from the inevitable shocks that happen in a business.

The problem is it’s really easy to get in operational mode and overlook the strategic or risk management decisions. That’s where we come in. To help us make sure those decisions don’t get missed. We’re going to do this in two ways:

1. Establish financial “triggers”
2. Create offensive and defensive action plans

With each of these, we’re going to incorporate them into our financial reporting frameworks, so that each week, month, or quarter, we’re seeing where we are in relation to these triggers and know when it’s time to pull out “the plan.”

First, let’s talk about these triggers.

FINANCIAL TRIGGERS: HOW YOU KNOW WHEN TO ACT

Once we understand the types of decisions, the next step is setting up triggers that signal when action is needed. Business is business. It’s a whirlwind of disaster after disaster, stress after stress, and high after high.

During this whirlwind, it’s easy to miss clear signs that your business is changing. To counteract this, we want to establish what we call gates and buffers on each of our key KPIs.

So what is a gate and what is a buffer?

A gate is a specific threshold where action must be taken. It’s when cash falls below a certain amount that you freeze spending and implement new AR and AP policies.

A buffer is a soft warning zone that signals to you that you’ve fallen out of the “comfort zone.” It’s an early warning system that an issue might be coming.

Here are some examples of what a gate or buffer would look like:

I live in Oklahoma and we’re entering spring, which is tornado season. Each day, meteorologists give a forecast and on days with elevated tornado risk, they’ll issue a tornado watch. This watch is a “heads up” that we should stay aware of what the weather is doing. This is like the buffer.

But when a tornado actually happens, if close enough to you, the tornado sirens will go off. This is the signal that it’s time to stop playing around and go straight to your tornado shelter or tornado safe place. Often, you’ll have only minutes to act. This is the gate.

The problem is, because of the frequency of both, you become desensitized. You don’t pay attention to the weather and get caught in a bad spot when the warning comes. Or, instead of going to your shelter on a warning, you turn on the weather and wait till it’s a mile, or blocks, away. But tornadoes are fickle. Some are big and will stay on the ground for a long time. Others randomly drop on a spot and go back up. By waiting until you “see it,” you could be waiting too late and putting yourselves in harm's way. People die every year of small tornadoes because they didn’t heed the warnings.

Same goes in business… with all the craziness, we can become desensitized. But the problem is this sort of desensitization can have devastating consequences. Big tornadoes can hurt or injure you even if you do all the right things. But this desensitization leaves you exposed to the small ones too. And the consequences… well that’s anything from injury to your life. With your business, that could be missing your goal, to layoffs, to bankruptcy. And big or small tornado can lead to total destruction. Your business is the one house, which can lead to the destruction of one. But if that one is you, nothing else matters.

So, when we cross a buffer we must pause, and when we hit a gate we must act now.

In business, it’s easy to act without a plan and out of emotion. And this irrationality ultimately sabotages results. How do we counteract this? By pre-planning. We make the plan before we get to the crisis so that when the crisis comes, we have our clear thinking self on the problem too.

And this is what we’ll talk about next week: offensive and defensive action plans. When we pair this with our gates and buffers, we have a recipe for better decisions:

The gates and buffers force us to pause, then the action plans remind us of the plan, which improves decision quality.

I look forward to sharing more with you then!

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