Skip to 0 minutes and 4 seconds The use of financial information for budgeting, planning, and control is a routine regular thing. But what if there is a strategic decision that needs to be made outside the normal budgeting process? This can occur from time-to-time, and these decisions may need to be made quickly to resolve an unexpected challenge, or take advantage of an opportunity that has presented itself. In these situations, financial information is critical to support decision making. The board will need financial information, and analysis to help them weigh up the various options. Now the ability of the finance team to provide accurate, complete, and timely financial information is really put to the test. Consider the process of launching a new product.
Skip to 0 minutes and 54 seconds In order to do this, you will need to collate a lot of information to accurately predict if a new product is worth launching. To gain this information, you may do some market research, look at the cost of making your new product, or get cost estimates from potential suppliers. You will also have to set a price for it, and forecast the profit the could be achieved. There may be situations where there are a range of options, and the different financial impacts of each need to be calculated and analysed. For long-term decisions, you may need to compare the financial impact of going ahead with the financial effect of other options, such as keeping hold of the money in the bank.
Skip to 1 minute and 44 seconds All uses of financial information rely on it being of good quality in the first place. After all, the decision is only as good as the information it was based on. So how is the quality of the information assessed? When we consider the qualities of good financial information, they have a lot in common with the qualities of good information in general. It should be accurate, complete, relevant to the users’ needs, reliable, available when it is needed, and easy to use. Another factor to consider for a finance team is the cost of generating extra information versus the benefits that will be gained by producing it. If the cost outweighs the benefits, then it may not be sensible to produce the extra information.
Skip to 2 minutes and 32 seconds These factors apply equally to financial information used within a business, and for academic study in accounting and finance. Well in general, having the data and using the data, knowing how to use the data is a crucial aspect of our PhD, at least the one that I’m– the study that I am doing. So the features that are really important for data are that they have to be correct. They have to be informative. Obviously, there have to be as little missing data as possible. It has to be really reliable. So it has to come from a trustworthy source. An example of the trade off between cost and benefit could be as follows.
Skip to 3 minutes and 17 seconds Imagine a potential customer approaches you for a one-off order that is needed to be filled at short notice. If you were to take time checking all of the potential suppliers, costs, and quality of the product, and checking your potential profit from the sale, by the time you have all of this information the customer could have gone elsewhere. Sometimes you need to take a leap of faith in order to secure a potentially lucrative sale.
Using financial information to make decisions
The use of financial information for budgeting, planning and control is a routine, regular thing. But what if there is a strategic decision that needs to be made outside the normal budgeting process?
In this video, Alice and others discuss how this works, and what features of financial information are important. The cost benefit trade-off for financial information is also discussed.
In the next part of the course there’s a chance for you to check your understanding of the key points we’ve covered so far this week. After the quiz there’ll also be an opportunity to learn more about two more skills which are important for careers in business, finance and accounting.
Have your say
What features do you think an accountant needs to look for when assessing the quality of financial information?
Sometimes once you have gathered and analysed the data, there may be more than one viable option to choose from. How have you done this with a decision you have made in the past? What factors are important?
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