What are the benefits and shortcoming of only using qualitative techniques to make long term financial decisions free essay sample

What are the benefits and shortcoming of only using qualitative techniques to make long term financial decisions? (5%) Qualitative techniques are used to make long-term financial decisions among small and medium enterprises (SMEs) with great consistency. The qualitative based decisions are made on experiential knowledge of the various factors involved rather than on monetary measurements, yet they have significant impact on profitability. Techniques used for long-term decision-making are interpretive and seek to achieve in-depth understanding of the companys overall situation. Companies use techniques such as SWOT, PESTLEI, human resource management, and Stakeholder analysis to guide their decisions. These techniques are considerate of the employee morale, relationships with suppliers and needs of present and potential customers. Benefits Qualitative techniques positively affect SMEs’ external reputation, labour relations, innovation, investment and quality. A firm may consider specific decisions that are cost effective such as moving part of their production overseas to take advantage of decreased capital expenses, however if the decision is looked at qualitatively, the overall view is that the firm is unpatriotic or inconsiderate of local suppliers. We will write a custom essay sample on What are the benefits and shortcoming of only using qualitative techniques to make long term financial decisions? or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page For SMEs their reputation with their business partners, customers and the community is a valuable asset that would not be risked for profitability Qualitative techniques can be utilized to understand market segmentation. By understanding why customers of a particular demographic or standard of living choose to buy a companys product, they can make decisions on budget allocation, or increases in production. Behavioral observation considers the connection of customers to the company and SMEs rely on these observations to make there production decisions. For instance, the owner of a bakery may notice the change in market trends to specialty cakes and stylized cupcakes based on customer requests perpetuated by popular television shows such as Cake Boss and Cupcake Wars. Quantitative analysis may show that he currently has steady profits with his sale of bread and pastries and to branch out into specialty cakes would be an unnecessary increase in cost of production. However the sales boost of focusing on a niche market that already has a following for the high end products is a risk with a high pay off made possible by qualitative analysis. It is widely acknowledged that regardless of cost, it pays for employers to invest in employee morale. Companies that consider the ‘numbers’ over the actual benefits when deciding upon salary decreases, layoffs or canceling benefits, disregard the effect on morale and therefore on productivity and loyalty. Qualitative analysis will consistently acknowledge the people factor of business. Many SMEs quite often value their staff as the foundation of their business and consider the well being and affect on staffing before implementing a financial decision. Sole focus on quantitative data tends to hinder innovation within SMEs. Innovation requires management buy-in into qualitative judgement as a real asset. Companies usually take a number-driven approach to innovation but many of the best decisions were not financially sound. Companies such as Facebook, encourage employees to pitch ideas directly to Mark Zuckerberg emphasizing the importance of insights enervation. Chairman and CEO of GE, Immelt has turned to GEs core customers for actual product and research and development ideas during what he has coined dreaming sessions which quite literally make customers dreams come true by taking their dream ideas to the production team. Shortcomings Solely relying on any one analysis techniques is certain to bring about disadvantages. Qualitative techniques lack Quantitative techniques while placing emphasis on passionate or gut decisions by managers, do not have one hundred percent accuracy in making a financial decision. Assessing the strengths and weaknesses, opportunities and threats will give a clear picture of the organization but can not be a stand alone decision process. A company will be putting itself at risk by making a financial decision devoid of actual financial analysis. Quantitative techniques such as behavioral observation are at a disadvantage for companies who are interested in generalizing data analysis and predicting new trends for the company. The subjectivity of qualitative decision-making reduces the accuracy of fore-casting. Decisions such as capital budgeting must include actual quantitative tools because qualitative analysis falls short in reliability when a company attempts to predict the future trends of the company The nature of the business will determine the level of utility that can be gained from qualitative techniques. Businesses that rely heavily on customer preference and market trends such as the case in the fashion industry, will reap the benefits of qualitative tools. Finance based companies that need to make number-based decisions can not solely rely on those techniques. The total reliance on qualitative decision making is not a typical feature for SMEs as it is usually supported with the quantitive data. Creditors will consider the entire picture presented by the organization before making a decision to lend or invest. A firm that makes all their financial decisions qualitatively is an obvious risk. It is often difficult to predict the effect that qualitative information will have on a creditors perception of the company and it proves therefore to be a disadvantage. Compiling qualitative analysis with quantitative assessment of a company will provide future investors with a more comprehensive picture of a company.