How will your knowledge of the financial concepts help you in your future projects and proposals?
Knowledge is power and powerful. So it may not do anything to your decisions, but with them - at least you would be making an informed decision instead of one with your head potentially in the sand or in a vacuum. So to answer the question, yes knowledge would effect the potential projects and proposals. You will start to access PVA, NPVA and various other capital aspects and use these to shape your decisions as well as how you approach them. Additionally,it will challenge you to develop metrics for "things" not normally "accounted for" and develop more "realistic" metrics for "cost of quality" and skill level/intellectual property of workers.
Conceptually understanding the financial aspects and their interactions coupled with common sense will help make sound decisions. NPV takes in account the true value of money, which PBP or ROI does not. But depending on a company's perspective and time frame, the PBP may be more important than the highest NPV, due to cash flow issue and cash reserve requirements.
Does the risk level of a leader come into play when making such financial decisions? How so?Yes it comes very much into play. Betting on the company's cash reserves and confidence in the Sales force to exceed the forecast is needed to meet the competitive pressures. Also it allows you to look past the strict restraints of PBP that are prevalent (Industrial age mentality) and more into the NPA aspect of projects. Risk may take 5 years or so to pay off big and these projects would be pursued if PBP was used in combination of NPV of only 3 to 4 years. It is very easy to miss big profits from not choosing a project, because its payoff took too long.
Will the decision-makers’ preference of the four lens impact his or her decision making based on the financial models reviewed in this module? Why?
Yes, the preference for one aspect of the four lens and not all of them will impact a decisions-maker's perspective significantly. This was evident in the HBR articles about budgeting. Typical industrial age and type A perspective dominate the budgeting perspective of a company. This causes many companies to forget what their true vision and mission is when addressing the strategic initiatives. The leader must guide the decision-maker's to embrace the four lens approach or have the budgeting and planning processes embrace each other instead of competing against each other. Strategic objectives through implementation of initiatives can only be achieved through human, capital, and financial resources. These resources are typically heavily relied on for planning, but usually not budgeted for in the budget process. Allocating and committing these resource in the budgetary process facilitates motivation to achieve the strategic directives put forth by the company's vision.
It is important for the leader to ensure that strategy, short-term planning, and budgets interact for the betterment of the company's wealth. The four lens approach allows the executive management to not only quantify initiatives, but also prioritize them and identify any gaps in objectives that may exist. This fosters communication among the workers and leads to greater innovation, enhanced performance, and competitive advantages, which all contribute to the long-term growth and wealth generation for a company.
Strict type A perceptive of focused only on the budgetary results ignores the the long-term growth plans and SHV that includes
R&D investments, Process Improvements, New markets and customer, management of intellectual property, and increase in asset base (property, plant, and new equipment).
These are all drivers for value creation and cash flow. A budgetary perspective focuses only on short-term earning and metrics, which result in corresponding responses and being short-sighted.
