Just three types of financial decision-making blunders can cost companies around 3% of their net profit. The chart below shows the most frequent business decision errors reported by more than 90% of 182 finance executives in a recent Gartner survey.
Read more:Reduce the Staggering Costs of Poor Operational Decisions
Confusing a desired outcome with the likely outcome
Business decision makers most often confuse what they would like to see happen with what is likely to happen. A common example of this is setting aggressive sales targets and assuming they will be achieved.
Overlooking a decision’s effects on other parts of the company
Operational decision makers often ignore a decision’s effect on other parts of the company, such as setting a bad precedent with excessive price discounts to get a deal over the line, without considering the impact on future deals and long-term profit.
An “any business is good business” mindset
Many decision makers tend to value top-line over bottom-line results, fail to distinguish between “good” and “bad” revenue, or confuse revenue with cash flow. For example, a decision to add a feature to an existing product is based on the promise of higher sales volume and price, but fails to account for the costs of obsolete inventory, new warranty obligations, retooling of manufacturing and other factors leading to reduced asset efficiency.