Question

Qualitative factors are non-financial in nature but are important for management to consider when making decisions. Reflecting on a company for which you have worked (or are otherwise familiar), describe three qualitative factors that would be important for management decision-making. Then, assess each of them in order of importance. Given your assessment, justify a situation where the qualitative factors would outweigh the quantitative results. Be specific.

As portfolio activities are to be self-reflective, please make sure to connect the portfolio assignment to:

• Your personal experiences. Reflect on how this assignment topic is applicable to and will benefit you.
• Course readings and any external readings.
• Discussion forum posts or other course objectives.

Answer 1

While ibusiness idecisions ishould ibe idata-driven iand iusually iinvolve iconsideration iof iquantitative ifinancial iinformation, ithat idoesn't imean ithat iqualitative iinformation iis inot iimportant ias iwell. iThe igoal iof imanagement iaccounting iis ito iprovide irelevant iinformation ifor idecision-making. iBy iunderstanding iqualitative ifactors ithat ishould ibe iexamined iwhen imaking imanagerial iaccounting idecisions, iyou ican imake isure iyour ismall ibusiness iis iconsidering iall iof ithe iramifications iof ibusiness idecisions.

1. External iReputation

Small ibusiness iowners ishould ibe iaware ihow imanagerial-accounting-based idecisions iaffect ithe iexternal ireputation iof ithe ifirm. iOften, iquantitative ianalysis isuggests ia iclear ichoice ibetween itwo idecision ialternatives. iHowever, ithis itype iof ianalysis idoes inot ialways itake iinto iaccount iall ifactors. iFor iexample, ia imanufacturing icompany imay iconsider ioutsourcing ithe iassembly iof ielectronic iparts ioverseas. iWhile iexamining iprojected iincome istatements ioutlining ithe iquantitative ieffects iof ithe ichange ishows iincreased iprofitability, ithe ianalysis iis iunable ito itake iinto iconsideration iconsumer ibacklash irelated ito imoving ijobs iout iof ithe iU.S.

2. Labor iRelations

Nearly iany iquantitative ianalysis iwill idemonstrate ithat ispending iless imoney ion iemployees iincreases iprofits. iHowever, ithis imay ibe ishortsighted. iQuantitative ianalysis iusually idoes inot itake iinto iaccount ithe iimportance iof ihealthy irelations iwith iyour ilabor iforce. iFor iexample, ia icompany imay idecide ithat ito isave icosts iit iwill idiscontinue ian iannual iholiday ibonus ithat ihas ibeen ioffered ifor ithe ilast i20 iyears. iWhile ithere iis ino idoubt ithat ithis iwill ireduce icosts, iit icould ibe iperceived iby iemployees ias iantagonistic ior iheartless. iSmall ibusiness iowners imay iconsider iother iways ito icut icosts. iIn ithis icase, iit imight ibe ibetter ito ireduce iannual ipay iincreases iby ia ifraction iof ia ipercent ior ito ireduce ithe ibonus irather ithan ieliminate iit.

3. Creditor iEffects

While imost imanagerial iaccounting ifigures iare inot ireleased ito ithe ipublic, iqualitative iinformation iabout ia icompany's ioperations imay ibe iinadvertently irevealed ito icreditors. iThis iincludes ithe iopening iand iclosing iof iplants iand iretail istores, imanagement iturnover iinformation iand irumors iabout inew iproducts. iIn imany icases, iit iis idifficult ito ipredict ithe ieffect ithat iqualitative iinformation ihas ion ia icreditor's iperception iof ithe icompany. iAn iowner's ibest ibet imay ibe ito irecognize ithat isome ieffect iwill ioccur iand ibe iupfront iwith ithird iparties iif idamaging iqualitative iinformation iis irevealed.

4. Quality

In imost icases, iquantitative iinformation ineglects ito iprovide iinformation ion iquality. iBusinesses, ismartly ilooking ito ireduce icosts, imust ibe icautious ito iavoid isacrificing ithe ilong-term ibenefit iof ibeing iassociated iwith iquality iproducts iand iservices ifor ithe ishort-term iquantitative ibenefit iof icutting icosts. iFor iexample, ia iclothing imanufacturer imay isource ithinner iand ilower icost idenim ifor iuse iin imaking ijeans. iEven iif ithe icompany iis iable ito ipass isome iof ithese icost isavings ion ito iconsumers, ithe iassociation iwith ilower iquality iproducts imay ibe idetrimental ito ithe icompany.

Qualitative ifactors iare idecision ioutcomes ithat icannot ibe imeasured. iExamples iof iqualitative ifactors iare:

1. Morale. iThe iimpact ion iemployee imorale iof iadding ia ibreak iroom ito ithe iproduction iarea.

2. Customers. iThe iimpact ion icustomer iopinions iof ia ibusiness iif ian iinvestment iis imade iin ianswering itheir iphone icalls iin iless itime iby iadding icustomer isupport istaff.

3. Investors. iThe iimpact ion iinvestors iof iconducting ia iroad ishow ito imeet ias imany iof ithem ias ipossible.

4. Community. iThe iimpact ion ithe ilocal icommunity iof iallowing iemployees ito ispend ia ifew ihours iof ipaid itime iassisting iwith icommunity iprojects.

5. Products. iIt imay ibe ipossible ito iuse isomewhat icheaper icomponents iin iproducts. iHowever, iif ithis iis idone itoo imuch, iit imay icreate ian ioverall iimpression iof ireduced iquality, iwhich imay ilead icustomers ito ibuy ifewer iproducts.

A imanager ishould iconsider iqualitative ifactors ias ipart iof ihis ior iher ianalysis iof ia idecision. iDepending ion ithe imanager iand ithe ilevel iof iinvestment iinvolved, iqualitative ifactors ican ibe ithe ideciding ipoint iin iwhether ito iengage iin ia icertain iactivity. iFor iexample, iif ia ilarge iinvestment iof ifunds iis iinvolved, ithe ikey idecision ifactors iare imore ilikely ito ibe iquantitative, isince ithe iinvesting ibusiness ihas ia igreat ideal iat istake iin ithe idecision. iHowever, iif ithe iinvestment iof ifunds iis iminor, ithe iimpact iof iqualitative ifactors icould iplay ia imore iimportant irole iin ithe idecision.

i i i i i i i i i i i i i i i i i i i i i iFundamental ianalysis iis ithe imethod iof ianalyzing icompanies ibased ion ifactors ithat iaffect itheir iintrinsic ivalue. iIt idetermines ithe iunderlying ihealth iand iperformance iof ia icompany iby ilooking iat ikey inumbers iand ieconomic iindicators. iThere iare itwo isides ito ithis imethod iof ianalysis: ithe iquantitative iand ithe iqualitative.

1. When iperforming ia ifundamental ianalysis ion ian iinvestment iopportunity, iIt’s iimportant ito itake iinto iconsideration iboth iquantitative iand iqualitative ifactors.

2. Quantitative ifactors irefer ito ithe ifinancial inumbers ithat ireflect ithe ihealth iand iprofitability iof ia icompany, isuch ias ithe icompany’s iassets, iliabilities, irevenue, iand iprice-to-earnings i(P/E) iratio.

3. Qualitative ifactors, ihowever, irefer ito inon-numeric iaspects iof ithe icompany ithat iare isomewhat imore iintangible ibut inonetheless iaffect ithe ipotential ivalue iof ia icompany.

4. Examples iof iqualitative ifactors iinclude icustomer isatisfaction iwith ithe icompany's iproducts, ipending ilitigation ithat iharms ia icompany's ireputation, ia ichange iin ia icompany’s imanagement, ior ia inew itechnology ithat igives ia icompany ia icompetitive iadvantage.

5. You ican iuse ithe iresults iof ia iqualitative ianalysis ito ished iadditional ilight ion iyour iquantitative ianalysis, igiving iyourself ia imore icomplete ipicture iof ithe ifuture igrowth ipotential iof ia icompany.

The iquantitative iside iinvolves ilooking iat ifactors ithat ican ibe imeasured inumerically, isuch ias ithe icompany's iassets, iliabilities, icash iflow, irevenue, iand iprice-to-earnings iratio. iThe igoal iof ifundamental ianalysis iis ito iproduce ia iquantitative ivalue ithat iinvestors ican icompare iwith ia isecurity's icurrent iprice, ito ihelp idetermine iwhether ithe isecurity iis iundervalued ior iovervalued.

The ilimitation iof iquantitative ianalysis, ihowever, iis ithat iit idoes inot icapture ithe icompany's iaspects ior irisks iimmeasurable iby inumber ithings ilike ithe ivalue iof ian iexecutive ior ithe irisks ia icompany ifaces iwith ilegal iissues. iThe ianalysis iof ithese ithings iis ithe iother iside iof ifundamental ianalysis: ithe iqualitative iside ior inon-number iside.

How iQualitative iFactors iImpact iFundamentals

Although irelatively imore idifficult ito ianalyze, ithe iqualitative ifactors iare ian iimportant ipart iof ia icompany. iSince ithey iare inot imeasured iby ia inumber, ithey itend ito ibe isubjective iand irepresent ieither ia inegative ior ipositive iforce iaffecting ithe icompany. iBut isome iof ithese iqualitative ifactors iwill ihave imore iof ian ieffect ithan iothers, iand idetermining ithe iextent iof ithese ieffects ican ibe ichallenging.

Examples iof iqualitative ifactors iinclude icustomer isatisfaction iwith ia icompany's iproducts, ipending ilitigation ithat iharms ia icompany's ireputation, ia ichange iin ia icompany’s imanagement, ithe irelationship ithe icompany ihas iwith ikey ivendors, ior iownership iof ia inew itechnology ithat igives ithe icompany ia icompetitive iadvantage

How ito iPerform ia iQualitative iAnalysis

To istart, iidentify ia iset iof iqualitative ifactors iand ithen idecide iwhich iof ithese ifactors iadd ivalue ito ithe icompany, iand iwhich iof ithese ifactors idecrease ivalue. iThen idetermine itheir irelative iimportance. iThe iqualities iyou ianalyze ican ibe icategorized ias ihaving ia ipositive ieffect, inegative ieffect, ior iminimal ieffect.

If, iwhen ilooking iat ithe icompany's inumbers, iyou isaw igood ireason ito ibuy ithe icompany, ibut isubsequently ifound imany inegative iqualities, iyou imay iwant ito ithink itwice iabout ibuying. iNegative iqualities imight iinclude ipotential ilitigation, ipoor iresearch iand idevelopment iprospects, ia ireputation ifor ipoor icustomer iservice, ior ia iboard ifull iof iinsiders. iThe iconclusions iof iyour iqualitative ianalysis ieither ireconfirm ior iraise iquestions iabout ithe ifindings ifrom iyour iquantitative ianalysis.

The ibest iway ito iincorporate iqualitative ianalysis iinto iyour ievaluation iof ia icompany iis ito ido iit ionce iyou ihave icompleted ithe iquantitative ianalysis. iThe iconclusions iyou icome ito ion ithe iqualitative iside ican iput iyour iquantitative ianalysis iinto ibetter iperspective iand imight ihelp iyou imake ia ibetter iinvestment idecision.