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Ben Kingsley Blog post by Ben Kingsley

Complicating Simple

Throughout the business world over the years there has been a lot of discussion about concepts and/or theories around best business practice, thought leadership theories etc, etc.  Great sayings like “if it isn’t broke, don’t fix it” to the complete opposite of “if it isn’t broke, break it”……..

My observations from my time in a corporate environment and now in SME have led to my own lessons about business.  For me it comes back to the basics around understanding your business and the numbers that make up your business, as your decisions around these numbers are going to mean the difference between success and failure.

Let’s look at a big business decision that a corporate enterprise might need to make.  Say a mining company is looking to develop a new iron ore mine with an estimated investment of $2 billion dollars before it even starts harvesting the ore.  To even get to this stage of estimating the initial set up costs, this business has undergone a detailed assessment analysis of the project and will incur the expenses and costs of getting to this point.  Interestingly this initial cost may never be recouped if the numbers don’t stack up enough to warrant proceeding with the mine.

If the initial assessment shows adequate potential from the modelling completed, the company may move into a more formalised and detailed analysis of the project and opportunity.  They might have up to 50 employees, consultants, subcontractors, management team etc, and working on putting the business case together.  This analysis must factor in assumptions, variables, and modellings as to the possible outcomes.

The whole project viability is going to come down to the skills, experience and knowledge of the team involved to ensure these numbers that make up the overall figures are as robust and ‘stress tested’ as possible, so the likelihood of them materialising is seen as paramount in the decision making process.  A right or wrong outcome on a project this size will have massive positive or negative implications on the overall business.  Highlighting that the initial costs are justified either way, as it’s better to spend (say) $50 million in detailed due diligence now to find out the project doesn’t have legs, instead of proceeding and potentially losing hundreds of millions of dollars.  Or if the project does have legs it allows for management to make the most informed decisions possible based on very complex and comprehensive number crunching.

In summary, in business, no ‘sound minded’ manager would make a decision based on simple estimates or top line figures without knowing the detailed numbers behind them.

Now let’s relate this back to one’s own household financial affairs.  You are the manager and controller of your money and potential wealth.  You are the one that’s going to be making small and on occasion very big decisions about how you allocate, manage, and invest your money.  So surely you should follow the same principles of business theory, meaning you should make sure that you have as many of the available facts, figures, projections, assumptions, variables on the table to make these decisions right?

OF COURSE SO, yet why is it that people managing their own financial affairs use basic calculations to form a position or view, which then ultimately leads to more bad decisions and hence bad outcomes than good ones?

Now some people are going to argue that they don’t have the skills or ability to make these decisions and guess what? – they are completely right!  THEY DON’T, but let’s refer back to the business above, do you think the CEO of that large organisation is going to have every skill in financial modelling to crunch the numbers on the new mine on his/her own?. Of course not!  So they outsource it to others to help.  From my years of experience in helping people manage their money, less than 1% of households have what I term ‘Elite’ money management skills, the rest of us (yes that includes me, as I outsource my personal financial decisions) can only benefit from having other more skilful and qualified people help us make these important decisions.  Let’s face it; we are talking about your future wealth here.

So the point I’m making here is: simple input leads to simple assessments and therefore far more bad decisions than good ones.

You need to understand that every decision you make with your money has flow on consequences…..big ones, so it’s my view that you need to move beyond simple analysis and find the real answers and yes it might be complicated and difficult.  That’s why it should be outsourced for you to get professional advice so that you can make better decisions and I can almost guarantee (as long as you outsource it to the right people) that the value and ultimate return to you will always outweigh the cost of someone’s help and advice.

Remember, knowledge is empowering – if you act on it!

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