At work -- Measuring Co$t vs B€n€fit of spending decisions
November 21, 2016 7:06 PM   Subscribe

At work, when you're faced with a decision that has a financial impact, do you have certain thought processes or rules of thumb that help you reach a decision? For example... Buy a piece of equipment vs lease it? Delay hiring in a role? Sell a less profitable product because it will help you get your foot in at a customer? Agree to a $10k consulting bill when you don't have a benchmark to check it against?

There are often grey areas because of qualitative factors, and there isn't necessarily a right or wrong answer... I'd appreciate hearing any examples of questions, approaches, or information you'd weigh to help you come to a financial decision.
posted by watrlily to Work & Money (2 answers total) 5 users marked this as a favorite
This is an impossible question to answer without knowing the specifics of your field. At a very high level, you need to evaluate the NPV of each initiative to ensure it's positive, but the specifics of how to do that is so different depending on the situation.
posted by sid at 7:40 PM on November 21, 2016

Depends. As sid says, it depends a bit on your field.

Some general guidelines:
--I always ask for competitive bids for a consulting engagement or other professional services, at least just to convince myself that I'm not paying silly money. The level of formality depends on the potential size of the award. I do this even if it is a small fun company doing something really cool. If a company resists a process with competitive bids, I don't trust them anyhow.

--I have a mental limit in my head where I can afford to quickslice decisions (however! make sure this mental limit is aligned with your company audit and compliance standards!)

--For campaigns and product pricing, I always run a ROI calculation and understand for myself how much I stand to lose. So, for instance, imagine everyone buys the minimum amount to activate a coupon or imagine all clients *only* buy the loss leader product-- how much can I lose? If the potential loss makes me gulp with fear, then I don't do that. :)

--Delaying hiring is something I do very reluctantly, since it generally just shifts the budget problem to the rest of the team. But it's a good idea to have a clear rule of thumb for yourself regarding how much business is needed to support a headcount, and plan from that. So if business is down, I might well delay hiring an execution specialist until it returns to those levels.

--For things like lease/buying decision, seek support from your Finance Manager and/or accountant. Buying may mean it has a less serious hit on your P&L in the first year than if you are leasing (capex vs opex) but it can also bite you in the rear end in other years. Sometimes it is honestly better to take a clean hit and get the pain over at once. Sometimes it isn't. But this is what your finance professionals are for-- but make sure you ask the right questions!
posted by frumiousb at 10:16 PM on November 21, 2016 [2 favorites]

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