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Bad financial decisions cost firms more than 3% of profits

Bad decision-making by management is denting profits by more than three per cent, according to a recent study by Gartner. It found that 61 per cent of the business and finance executives it spoke to noted an increase in number of operational decisions being taken, driven by digital and other business transformations, including M&A. And more than half (57 per cent) indicated that these types of decisions materially impact business profitability.

The report noted that a “chronic occurrence” of poor operational decisions by midlevel managers is eroding margins, adding: “It is vital to the organisation’s bottom line that CFOs ensure those decisions are financially sound.”

“Managers tell us that they have faced a significantly higher volume of financial decisions over the past three years,” said Randeep Rathindran, research vice president at Gartner. “This increased volume has exposed the lack of rigor employed by most midlevel managers in reaching material decisions that impact the bottom line.”

The report suggests that CFOs should take the following actions:

  • realign support around specific financial decisions, not stakeholders;
  • understand where in the organisation decisions are being made that go against rules put in place by finance;
  • provide better support to decision-making managers by redefining the role of their finance business partners – those assigned to support decisions from business unit managers – to more specialised positions focused on individual decision types.

The graph below shows where the survey's respondents found the highest number of decisions that were counterproductive to the organisation's financial strategy. It shows that pricing adjustments, new marketing campaigns, and product or service improvements were the main areas where bad financial decisions were made.

Gartner's survey included the views of 469 business decision-makers and 128 senior finance executives globally across various industries as part of its 2018 study.


This item appears in the following sections:
Operations
Best Practices & Benchmarking in Operations
Risk Management
Financial Risk Management

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