After 14 years of working with founding editor Gil Roth, I’m retiring this Financial Analysis column. Thanks for your support, Gil! My hat’s off to those who write any regular column for any type of publication; it’s not always easy to come up with a few hundred words that make a compelling point.

In this last column, I want to offer some parting thoughts about making financial decisions.

Unintended Consequences
I’ve written about this topic more than once. But the idea is worth repeating — please go out of your way to consider as many potential consequences as possible before making any financial decision. It’s easy to use computer models to show the likely effects of raising or lowering prices, expanding or contracting capacity, changing a compensation formula, or adjusting a fringe benefit package. Studies from the Congressional Budget Office (CBO) are notorious for overstating the gain in revenue from a federal tax increase, because they do not consider the dynamic effect of potential behavioral changes made by those subject to that increase. Even minor financial modifications made at the margin can lead to unforeseen changes that will lessen the impact of the new policy.

Analysis Paralysis
Don’t fail to make critical financial decisions while you engage in superfluous financial analysis. Model the decision, consider the unintended consequences, and examine the alternate “what if” scenarios. But resist the temptation to conduct multiple, multi-dimensional, and time-consuming studies of every potential action. Competitors will not stand still while you model out every potential outcome and seek financial clarity about a project’s return to the fourth decimal point. Also, market conditions can change rapidly; your extensive (over)analysis might be useful in a graduate school business class, but might not be particularly relevant if the conditions that exist when you’re ready to make the decision have changed from those that prevailed when you began analyzing the project. I had a professor in college who always urged us to “pay your money and make your choice” and do so after only taking an “appropriate” amount of time for analysis.

Understand the Impact of Different Types of Incorrect Decisions
I had another professor in college who wanted to us to ask the question, “How would I rather be wrong? Would I rather make an error of commission or one of omission?” Many people I meet think it’s ridiculous to assume you might make an incorrect decision. But I’ve found it very useful to examine and evaluate the potential negative impact of various types of decisions.

For instance, would I rather spend the money to fix an old but functional piece of expensive equipment, and take a chance that something else might go wrong with it in the near future? Or spend much more money buying a new piece of equipment, suffer the downtime involved in replacing it, and miss the chance to do something else with those funds?

• Don’t assume you’ll make the correct decision (i.e. you fix the old piece and it works for many years); assume you’ll make the incorrect one (i.e. you fix it and it develops a more serious problem in a week).
• Don’t assume you’ll make a different type of correct decision (i.e. you replace the equipment, overcome the downtime, and still have money for other things); assume you’ll make an incorrect one (i.e. the new piece of equipment will not fit properly, it will cause more downtime than expected, and it’s complicated electronics will make it harder to maintain and troubleshoot).

By the way, we’re about to fix our old washing machine — but buy a new dishwasher. And after almost 39 years of marriage, I think I’ve finally convinced my wife to use my techniques of analysis.

I hope you find these parting comments useful and wish you all the best of luck in your future endeavors — both personal and professional.

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Michael A. Martorelli
Fairmount Partners

Michael A. Martorelli is a Director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this column contact him at Michael.martorelli@fairmountpartners.com  or at Tel: (610) 260-6232; Fax (610) 260-6285.