Human needs and wants are never static as it is the nature of people to demand new things from time to time. There is a need to follow the investment decision-making processes to avoid financial shortcomings associated with rush decisions. A company needs to evaluate the kind of investment it would like to inject into its funds. It must consider all the available facts and assumptions before coming up with a binding investment decision. For example, whether the project idea meets current demand and if it is affordable to the population.
In addition, an investment is an asset or item acquired to generate future payments that will compensate the investor. Besides, a decision is a course of action purposely chosen from a set of options to achieve the company’s goal. The main investment goal is to compensate the investor by way of selling the acquired asset at a profit. For an investor to make a profit, the acquired items or assets must appreciate in value.
What is an investment decision?
An investment decision refers to a logical course of action intended to allocate funds in a specific investment opportunity to earn the highest possible return. It assists firms in selecting the best type of assets for deploying their funds. Assets fall into two categories which are short-term and long-term assets.
5 reasons why investment decision making is an Important Process before investing
The following are the five reasons why investment decision making is an important process in business:
1. Helps to find out investment options available
It is important for a company to evaluate all the investment projects available before making decisions. It helps the company to determine the best investment project amongst the many. This is because the company can only come up with a better decision after measuring every option. That helps an entity is to avoid projects with high-risk exposure and limited profit. The best way companies can get the most profitable and less risky investment projects is by identifying and evaluating the available options.
Therefore, identifying the best project among the many investment alternatives available enables the company to earn more at the end of the investment. At the same time, it helps the company to secure its investment and avoid all the avoidable risks.
2. Helps to choose a decision-support tool and set the rule
The second benefit of investment decision-making is to help the company identify the best investment project among the available options. It requires an entity to choose a decision support tool and set its decision rule. Decision support tools refer to computerized programs that analyze data in an organization or business, enabling managers to decide courses of action. And decision rule refers to a guide for decision making designed to ensure that accounting decisions are consistent, effective, and follow the business principles.
Therefore, the decision support tool and decision rule aid an organization in benchmarking and assessing the economic viability of a project. It is at this stage that a project’s relevancy in the future is considered. For example, Nokia changed from producing GSM phones and started manufacturing smartphones as a way of sensing the future market.
3. Helps to collect information needed in making a decision
Besides choosing a decision support tool and setting the decision rule, the company needs to collect all the necessary information that it can base on to make a decision. The information collected consists and not limited to evaluating the risk levels of particular projects, the amount of money required, and the proceeds at the end of the investment.
Furthermore, the collection of information involves reviewing the performance of the past projects and basing on that to assess the new project’s sustainability. It is through data collection that an entity gets the relevant information to use in making a decision. For example, PCL evaluates the past price of material and housing unit in comparison with the current and forecast the future.
4. Helps to analyze data
Last but not least, the most significant benefit of making an investment decision is that it helps in analyzing data. Data analysis is the process of cleaning, transforming, and modeling data to discover important information for business decision-making. Its purpose is to extract useful information from data and taking the decision based upon the data analysis. After collecting all the necessary information needed in decision-making, it is necessary for the company to analyze data.
5. Helps to interpret results in relation to the decision rule
Lastly, the benefit of investment decision-making is assisting the company to interpret the results based on its decision rule. It is important for the company to interpret results clearly and accurately in relation to the set decision rule. It is done to ensure that the option taken by the company is economical and falls under the business principles. In the end, it helps the company to make a consistent accounting decision.
In summary, it is the best practice of accounting for all companies seeking to invest to consider following the investment decision-making process. This is because companies that have followed this process have managed to minimize their chances of loss.