A decision answer follows a chain: what the figures show, the likely cause, the options, and the risk of each. The recommendation comes last.
This lesson is part of financial statements and interpretation. It uses the ratios from interpreting financial ratios.
How do I move from a figure to a decision?
Write four short lines in order.
- Figure: what changed, with numbers.
- Cause: the likely reason, from the case.
- Options: two actions the owner could take.
- Risk and choice: the drawback of each, and which you recommend.
Each line uses the line before it. A recommendation with no cause behind it is a guess.
Worked example: Kedai Maju’s margin
Kedai Maju is a fictional shop. In Year 1 its sales were RM100 000 and its cost of sales was RM60 000. In Year 2 its sales were RM110 000 and its cost of sales was RM70 400.
Figure. Year 1 gross profit = RM40 000, a margin of 40%. Year 2 gross profit = 110 000 − 70 400 = RM39 600, a margin of 39 600 ÷ 110 000 × 100% = 36%. Sales rose by RM10 000, but gross profit fell by RM400.
Cause. Cost of sales rose from RM60 000 to RM70 400, an increase of RM10 400, which is more than the RM10 000 rise in sales. The shop’s buying cost rose faster than its sales. The likely reason is higher supplier prices, which should be checked on the invoices.
Options. Option A: raise selling prices to restore the margin. Option B: ask the supplier for a lower price or find a second supplier.
Risk and choice. Option A may lose price-sensitive customers. Option B takes time and may not succeed. The owner should first check invoices, then try Option B, and raise prices only if the supplier does not agree.
Every line in the answer comes from the figures or the case. The recommendation follows from the cause.
The mistake that costs marks
The common slip is to write a decision that does not follow from the figures. “The owner should advertise more” does not address a rise in buying cost.
| Step | Wrong | Right |
|---|---|---|
| Figure | margin fell from 40% to 36% | margin fell from 40% to 36% |
| Cause | not stated | cost of sales rose faster than sales |
| Decision | advertise more | check invoices, then negotiate with the supplier |
| Fit | advertising does not lower buying cost | the action acts on the cause |
Test every recommendation by asking whether it acts on the cause you found.
Check yourself
A cafe’s sales were RM50 000 in both years. Its expenses rose from RM10 000 to RM14 000 after it rented a bigger shop. Net profit fell. Write one option the owner could take and one risk.
Answer
Figure: expenses rose by RM4 000 with no rise in sales, so net profit fell by RM4 000.
Option: fill the extra space with more seats or a new product to raise sales. Risk: extra sales may not arrive soon, and the higher rent continues in the meantime.
Another valid option is to negotiate the rent or move back to a smaller shop, with the risk of losing customers who like the new location.
What to study next
Go on to explaining limitations of one-period comparisons. Then try the practice set.
The business case answer planner provides a layout for the figure, cause, option and risk chain. For a teacher to work through decisions with you, see online one-to-one Business tuition.