Today’s turbulent business environment has produced an ever greater
awareness amongst managers of the financial dimension of decision
making. ‘The bottom line’ has become the driving force which, perhaps
erroneously, determines the direction of the company. In some cases this
has led to a limiting, and potentially dangerous, focus on the short term.
Hence we find that investment in brands, in R&D and in capacity may
well be curtailed if there is no prospect of an immediate payback.
Just as powerful an influence on decision making and management
horizons is cash flow. Strong positive cash flow has become as much a
desired goal of management as profit.
The third financial dimension to decision making is resource utilization
and specifically the use of fixed and working capital. The pressure in
most organizations is to improve the productivity of capital – ‘to make
the assets sweat’. In this regard it is usual to utilize the concept of return
on investment (ROI). Return on investment is the ratio between the net
profit and the capital that was employed to produce that profit, thus