Learning Outcomes
- Identify relevant non-financial information
In our B&B example, we took a five-year look at the project, taking the initial investment into account:
| Annual | Cumulative | |||
|---|---|---|---|---|
| Cash flows | Single LineGuest Room | Single LineGift Shop | Single LineGuest Room | Single LineGift Shop |
| Year 0 | $(36,000) | $(65,000) | $(36,000) | $(65,000) |
| Year 1 | $ 21,900 | $ 28,800 | $(14,100) | $(36,200) |
| Year 2 | $ 21,900 | $ 28,800 | $7,800 | (7,400) |
| Year 3 | $ 21,900 | $ 28,800 | $29,700 | $21,400 |
| Year 4 | $ 21,900 | $ 28,800 | $51,600 | $50,200 |
| Year 5 | $ 21,900 | $ 28,800 | $73,500 | $79,000 |
| Single Line$ 73,500Double line | Single Line$ 79,000Double line |
What we saw in the first column is that after five years, the gift shop is the better option, having brought in a net total of $79,000 taking the initial investment into account. However, in the first four years, the guest room has a higher total ($51,600).
However, if the future plan of the owner is to sell within four years, the cumulative net cash flow of $51,600 from the guest room is better than the cumulative net cash flow from the gift shop. Knowing about future plans is a relevant non-financial piece of information. Even knowing the future plans, it might still be better to convert the room to a gift shop if the future buyer is basing the purchase price on overall net cash flows or average daily gross revenues or some other formula based on cash flow.
Additional examples of relevant non-financial information for different scenarios other than our B&B example may include evaluating the impact a decision may have on a business’s relationship with its vendors. Other considerations may include exploring how a decision would affect the workplace environment, improve diversity in a company, as well as how it may affect the larger community or customers’ loyalty to a brand or company. There may also be new regulations, laws, recent labor rights litigation, or current market trends that impact a business’s decision. A mission-based company would likely consider a decision’s alignment with its mission, and many companies consider the impacts of decisions on their surrounding communities and the environment.
These are a few examples of relevant, non-financial data that are critical to making a solid financial decision. With every project, projection or plan, there are relevant non-financial pieces of information that provide a broader context surrounding the numbers that need to be considered in the overall decision making process.
Now, check your understanding of the non-financial information needed for short-term decision-making.
