Making financial decisions is never easy. That is a given. Making sure multiple points of view, strategies and possible consequences are considered will help to optimize results and protect the organization. Attempting to explore these three outcome oriented decision attributes and balancing them can be more art than science. However, making sure all three attributes are explored and discussed will add insight and help to improve results. With these three attributes you can either lean towards a “mitigating risk approach” or take an “optimization approach”. Both approaches work and is often influenced by the personality of the person applying the attributes.
The three attributes to consider are ROI (return on investment), safety, and confidence. These three attributes individually may appear simplistic, but together they can shape and focus discussion and positively impact strategy and sustainability.
ROI, safety, and confidence considerations very widely based on the financial challenge in question. The three attributes can be viewed through the following lenses:
|ROI (return on investment)||Safety||Confidence|
Each financial decision point of consideration is different and often complex influenced by timing, resources, and mission. Applying the three attributes can be best viewed by walking through a few examples.
Example #1: A board member asked a question about the organization maintaining too high of an average balance in its operating checking account as shown on the monthly financial reports?
In considering a proper response to the question, you want to project a balance between ROI, safety, and confidence when answering the inquiry, and at the same time, be aware that perception also matters. The order you discuss the attributes does not directly matter but often you can tell which attribute is of primary concern of the person asking the question and discussing that attribute first enhances overall confidence.
When it comes to cash and bank account balances, I like to address safety concerns first. I point out that our internal accounting control systems and cash management policies are comprehensive including minimum and maximum target balance requirements that help us to meet expenditure requirements while keeping cash exposure in our checking account at an acceptable level (safety). We can then explain that excess funds above the maximum target are transferred to an intermediate investment pool enhancing return on investment for these funds (ROI). By explaining these first two attributes we indirectly address the third attribute (confidence) that the cash position of the organization is well managed with proper controls and procedures in place.
Example #2: At a recent board meeting, board members, while reviewing the budget for the coming year, noticed that the middle school science camp program that was launched as a pilot program two years ago has grown in size and scope for the next year’s budget. They questioned the sustainability of expanding the camp program again this time from 15 sites to 30 sites and wanted to know if that was overall good for the organization.
Since the question came through a board budget review process, the question has financial undertones but is more complex than just the financial impact. The three attributes will serve you well in addressing the question.
The director in charge of the camp program explains that this program is directly in line with our mission to get young people excited about science and professional careers in science. Also, the strategic plan included expanding programs that will help raise young peoples’ interest in careers as scientists directly addressing board member (confidence) in the program. The director next points out that the investment in this highly successful camp pilot program the last two years has caught the attention of sponsors and foundations enabling the development department to secure a NSF federal grant and two new corporate sponsorships which will relieve the organization from using unrestricted reserves to fund the camps (ROI). Tempering this excitement is a general feeling of unease by the C-Suite that the rapid growth of the camp program might be expanding beyond the internal control systems and staff capacity to manage so many logistics at many different camp sites. The exposure to ensuring the (safety) of a growing number of young people at many new camp sites is becoming much harder to control for 30 camp sites then it was when the program was first started with just 4 camps.
In this example, two of the three attributes are highly positive, but the third attribute related to (safety) must be addressed especially since the program is rapidly expanding.
These three attributes can serve you well addressing difficult financial decisions that directly and indirectly impact finances, budgets, and managing your organization’s hard-earned resources.