3.3 - Decision making techniques

3.3 - Decision making techniques

1. Quantitative sales forecasting

   • Trend
     • Casual modelling and line of best fit
       • Correlation coefficient
         • 1 = Positive correlation
         • 0 = No correlation
         • -1 = Negative correlation
   • Seasonal fluctuations
   • Cyclical fluctuations
   • Random fluctuations
   • Limitations of quantitative sales forecasting
     • Not always right - what has happened before might not occur in the future
     • More reliable when...
       • Forecast for a short period of time - 6 months
       • Frequently take into account new data
       • Market is slowly changing
       • People who do it know what to do and have a feel for the market

2. Investment appraisal

   • The purchase of capital goods - which are used in the production of other goods
   • Simple payback
     • Time it takes for the money invested to come back in to the business
     • Advantages
       • Easy/simple
       • Useful for when technology changes rapidly
       • Helps prevent cash flow problems
     • Disadvantages
       • Cash earned after is ignored
       • Doesn't take into account inflation
       • The profitability is over looked
   • Average rate of return - ARR
     • Measures the net return each year as a percentage of the capital cost of the investment
     • ARR = Net return per annum / Capital outlay * 100%
     • Total money - investment / number of years
       • That number / original cost
     • Advantages
       • Shows the profitability of the project
       • Easy comparison
       • Opportunity cost is taken into account
     • Disadvantages
       • More complicated
       • Effects of time on the value of money are ignored
   • Discounted cash flow - NPV
     • Takes into account what cash flow or profit earned in the future is worth at the present value
     • Money in the future is worth less than the same amount now
     • Advantages
       • Takes into account the value of money
       • Value of expected cash inflows is accounted for
       • Opportunity cost can be included
     • Disadvantages
       • Much more complex
       • Accuracy depends on the choice of discount factor - educated guess
       • Doesn't include inflation

3. Decision trees

   • Minimise the risk
   • Greatest return
   • Decision point - squares
   • Outcomes - options for the decision
   • Probability or chance
   • Expected monetary values
   • Limitations
     • Outcomes are all estimates
     • Based on predicted data
     • External impacts
     • Unforeseen costs
   • Advantages
     • May show new possible courses
     • Place numerical values on decisions - improves results

4. Critical path analysis

   • See what project needs priority
   • A method of calculating the minimum time required to complete a project, identifying delays which could be crucial to its completion
   • Can help a business to imporve its efficiecny
   • Can help with decision making - stick + plan for deadlines
   • Working capital control - when resources will be required in projects
   • Earliest start time
     • Top right of the nodes
     • Go from left to right
   • Latest finish time
     • Bottom right of the nodes
     • Go from right to left
   • Identify the critical path
     • The tasks if delayed will lead to a delay in the whole project
   • Calculating the float
     • Total float = LFT - EST - duration
     • Free float = EST of next task - EST of task - duration
   • Limitations
     • All the times are estimates
     • Changes occur during the project
     • Can get confusing when theres lots of tasks

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