A Decision Tree to Weigh Investment Decisions

Running a business sometimes requires decisions to be made about what you should invest in. Do you invest in the new equipment to create Product X more efficiently? Or do you invest in the new equipment that will allow you to build a completely new line of products (“Product Y”)? If you can only invest in one of those options right now, which one is the better option?

A decision tree is handy here. I’ll give you a simple example to show you what a decision tree looks like:

Think of your business on the left with your two options branching out. Each option represents an expense as well as potential income and, of course, profit.

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But here’s where it’s really useful: Add the element of time for these decisions. Let’s say that Product X’s equipment can be implemented right away while Product Y’s equipment will take time to be installed into your business:

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Now, near each decision, write in the expenses you’ll incur in the month as well as the income and the overall profit. By doing this, you’ll have a much clearer idea of the overall impact that each decision will have on your business.

This works for more than just purchasing equipment. You can use this same simple diagramming solution to weigh the decisions of taking on one customer over another or using one type of financing method over another or entering one market over another.

A decision-making method that is straightforward, easy-to-use, and really helpful. Don’t you wish that accounting and finance was like that more often?