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Financial Decision Making – Return on Equity (ROE)

Management always grapples with how to make a certain return on equity. If an investor establishes a business, he instinctively wants to know how many times he can multiply his money over or have in mind what return he is willing to accept for his investment.  So, he is likely to look at what other investments are returning or say he wants a certain percentage over the risk-free rate of a savings account or government papers.

Return is referred to as the percentage of a quantity of profits over what was invested in the business. But how can the business’ management project what ROE it desires or determines how the business actually performed in this respect?  As you know, many variables are combined in running a business. Management makes decisions on the varying mix of costs of product inputs, price at which to sell the product, machinery costs, direct labor costs, marketing costs, administrative costs, etc. But the dilemma is how to mix these variables and in the right quantities/amounts to achieve the desired return on equity.  The Financial Analyst has a very important task of adjusting these variables or the mix to get the desired outcomes.

The ability to make administrative and financial decisions to affect a desired financial outcome is critical.  It helps to prevent management from “flying in the dark” in arriving at decisions. That’s why informed companies hire Financial Analysts to study the numbers and make recommendations.

I can build a financial decision template, if you so desire, to enable your management to make decisions in all cost areas of your company. It will enable you to make changes to different variables to arrive at a desired financial outcome. I would use your projected or past financial statements to create your template. You will see how one or a combination of costs changes affect other parts of the business. The template will enable manipulation of variables. You can see outcomes in a graphical / pictorial form. Templates are custom made as not all companies have the same mix of financial variables. Click here to send a message.