Making smart financial decisions is essential for achieving business success. As Henry Ford stated, “Make wise financial decisions today for a successful tomorrow.” American author Wilfred A. Peterson offered this: “Decision is the spark that ignites action. Until a decision is made, nothing happens.” It is important to be aware that emotions impact financial decisions and can lead to irrational or biased decisions. 

Why is Financial Decision-Making Important 

Wise financial decision-making enables effective resource allocation that aligns with company goals so that resources are best utilized and wasteful spending is minimized. It facilitates optimizing a company’s production of products or services and enables effective risk management. It enables a company to enhance its profitability and achieve long-term sustainability. In making decisions, awareness and caution should be exercised since emotions impact financial decisions potentially resulting in detrimental outcomes. 

What Emotions Impact Financial Decisions 

Many emotions can impact financial decisions including impulsivity, stress, fear, optimism bias, greed, overconfidence, anxiety, and denial, to name a few. Recognizing these emotions is the first step in preventing potential decision-making problems from natural human emotions.

3 Ways Emotions Impact Financial Decisions 

Here are 3 ways emotions can effect your financial decisions: 

  1. When an emotional decision is made in place of a better and more rational decision, negative results can occur for processes and financial outcomes. 
  2. When an emotional decision affects other people, including staffing levels, hiring choices, and compensation, individuals and the business itself can suffer.  
  3. Emotional decisions leading to poor choices in investments, spending, marketing, business controls, and more, can have a negative effect on a company’s bottom line, especially when a decision is made quickly without thinking through all the details. 

How to Avoid Letting Emotions Impact Financial Decisions 

  • It is important to understand the triggers of personal emotions that may hinder making informed deliberate decisions.
  • Find ways to get your emotions in check and practice the techniques that work for you.
  • Establish formal financial goals.
  • Always use accurate accounts and rigorously use financial statements to track business performance.
  • Carefully estimate the financial impact of each major initiative.
  • Surround yourself with the right people to support you and help you make good financial decisions. Choose people who are disciplined and behave with integrity.
  • Involve your team in decision-making

Ways to Improve a Company’s Financial Performance 

First, identify and control situations when emotions impact financial decisions. Additional ways include having a solid and reliable business plan, focusing on minimizing costs, improving accounts receivable processes, selling any tangible assets that aren’t being used, increasing prices strategically, consolidating business debts, increasing and improving marketing efforts, developing ways to expand your customer base, rigorously managing cash flow, and securing additional funding.

Get Expert Alternative Financing Assistance 

Contact Multiple Financial Solutions, with offices in Jacksonville, FL, and Houston, TX. We offer a portfolio of alternative funding solutions for companies that can’t get funding from banks including business lines of credit, merchant cash advances, and commercial real estate funding. We focus on businesses that have been active for 2+ years and are looking to grow to the next level. If you are facing a funding deficit, we are ready to help you.