To evaluate financing options, weigh each one using case evidence, name the trade-off, make a clear choice, and say when the choice would change. The judgement is the part that earns the top marks.
This lesson closes business finance. It uses the skills from comparing internal and external funding and interpreting cash-flow forecasts.
What is the judgement frame?
Use five moves. Each becomes one or two sentences.
- Option A: one benefit and one cost, with case evidence.
- Option B: one benefit and one cost, with case evidence.
- Trade-off: what you give up by choosing each.
- Choice: the option you recommend.
- Condition: when a different choice would be better.
Worked example: an invented bookshop
Kedai Buku Sinar needs RM20 000 for new shelves and stock. Option A: a bank loan of RM20 000 over 2 years at a flat 6% a year, with terms supplied by the case. Option B: use RM20 000 of the owner’s savings.
Loan interest: RM20 000 × 6% × 2 = RM2 400. Total repaid: RM22 400. Monthly repayment: RM22 400 ÷ 24 = RM933 (to the nearest ringgit).
Savings cost nothing in interest, but they would leave the shop with RM0 reserve. The case says the shop’s cash fell short in one month last year, so a reserve matters.
Judgement: “The loan costs RM2 400 more than using savings, but it keeps RM20 000 in reserve, which protects the shop from the kind of shortfall it had last year. The loan is the better choice, provided monthly sales cover the RM933 repayment.”
The mistake of one-sided evaluation
The common slip is to list pros and cons and stop. “Savings have no interest. A loan has interest. A loan gives more money.”
The answer has no choice and no reason. Add the trade-off, the choice and the condition, as in the judgement above.
Check yourself
Suppose Kedai Buku Sinar’s monthly sales exceed costs by only RM700. Does the judgement still hold? State the condition and give a revised choice.
Answer
No. The repayment is RM933, but the surplus is RM700, so the shop is short by RM933 − RM700 = RM233 each month. The condition has failed.
A revised choice: use part of the savings, for example RM10 000, and borrow only RM10 000, so the repayment is about half, RM467. The shop keeps a RM10 000 reserve and affords the repayment.
What to study next
Try the skills on an integrated case in finance decisions in an original small-business case. Then test yourself in the practice set.
The business case answer planner has a box for each move of the frame. For a teacher to push back on your judgements, see online one-to-one Business tuition.