Emotional financial decisions02nd February 2022
Imagine you decided to invest in a new product line, which you believe will double your profits and help fund your retirement one day.
You pour significant funds into its development, hire new managers and salespeople to get it off the ground... And initially, your hard work pays off. Early sales figures are positive - you’re so proud! But then there’s a change in the market.
A competitor has started producing a rival product that costs much less than you can ever manage - and your customers shift their loyalties.
Soon, you’re making an enormous loss.
You try every trick you can think of to lower production costs... You replace your salespeople... You invest even more in marketing... The loss actually grows.
Still, you persist. This was your “baby” - your retirement fund - and you just know that with a little more effort you can turn things around! Talk about pouring good money after bad...
Hopefully, that kind of scenario has never happened to you.
But it’s a typical example of how business owners make important financial decisions based on emotion - not logic.
This isn’t unusual at all. In fact, it’s a powerful phenomenon which affects all of us, both in our private lives and when managing our company’s finances.
Often, the emotions involved are negative...
In the example I just gave you, it’s aversion to loss. You can’t bear the thought that your beloved venture isn’t going to pan out, so you hold onto it far longer than you should.
Fear is a big one. When the market dips, for example, people panic and offload their investments quickly, when it would often be more sensible to hold onto them.
You have to have nerves of steel to watch your investments dwindle without acting - and most people don’t.
Then there’s shame. It’s so easy to ignore debt which you really should deal with, because you can’t face up to your financial situation.
But positive emotions like hope, excitement and over-confidence can also skew your decisions.
We all know people who’ve been passionate about a business idea which is clearly not viable, and burned through their savings to see their vision come true... Until those savings are gone.
The bottom line? It’s difficult to be sensible about money when emotion’s involved.
And when you’re managing your own money - both for your household or the business you’ve so lovingly built up - emotion is always involved.
That’s one reason why high net worth individuals routinely use financial advisors. No matter how good they are with money, they recognise that they still need calm, rational advice from an expert who is emotionally detached from their situation.
And it’s exactly why business owners should use a service like our Outsourced Finance Department.
Not only do we manage your finances day-to-day - for example, preparing monthly management accounts and cashflow forecasts, processing transactions and dealing with compliance...
...but we help you use all the financial information we generate to make better decisions for your company’s future.
And one measure of “better” is “less emotional”.
Please note, I didn’t say “unemotional”!
You can’t take emotion completely out of business decisions. Nor should you.
I’m a strong believer that your business has to work for you, as the founder. And that means it’s always important to consider what you care about and your personal vision for your company.
Many of the financial decisions you take will also have an emotional impact on yourself, your team and on your clients. You need to be aware of those.
Still, when it comes to making big decisions about where to invest your company’s money...
...You need someone by your side, who can give you a valuable financial perspective but is not emotionally invested the way you are.
The funny thing is, sometimes business owners tell us that they’re not quite ready to bring in an outside finance director...
...Because they believe that no one will ever care about their company’s financial future the way they do.
They’re reluctant to share financial decision-making with people who are less emotionally invested in the consequences of those decisions.
They don’t recognise that objectivity is an enormous asset.
You need the input of someone who won’t panic when the market turns...
Who won’t ignore the debt you’ve accrued because they’re ashamed of it...
Who won’t persist with a bad business strategy because they’re ‘attached’...
...Who you can trust to be open and honest with you about your best financial options - no matter how much pressure you’re under.
If that’s the kind of financial partner you’re looking for, please do get in touch today. Simply hit ‘reply’’ to this email or call us on 01279 647 447, and we can arrange a time to talk.
Together, let’s make the very best financial decisions for your future.
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