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The 3 key decision-making traps in your cash management and how to avoid them

Nick-Blog-ImageBusiness leaders make hundreds of decisions every day, from relatively inconsequential choices to hugely complex strategy shifts. But not all of these decisions are arrived at freely. There are a number of traps that our conscious and subconscious minds fall into when making a decision and these can have a profound impact on how a business both operates and performs. But, more specifically, when it comes to cash management, these psychological pitfalls could be leading to under-optimized, costly and stagnant processes in your business. Here’s how…

The esteemed Harvard Business Review article “The Hidden Traps in Decision Making” is just as applicable now, as when it was first published back in 1998. Its authors John S. Hammond, Ralph L. Keeny and Howard Raiffa proposed that there are eight key decision making traps that we often fall into when making decisions. These range from our tendency to stick with the status quo, to our preference to only consider evidence that confirms our bias.

decision making traps cash managementSo, how does this relate to your cash management? Well, retailers, restauranteurs and bankers alike are now placing a higher importance on developing key strategies for managing mobile and electronic payments yet are often guilty of neglecting their basic cash management strategies. But, with evidence suggesting that cash still accounts for up to 85% of payments worldwide, why are business leaders falling into this trap? Could there it be that their decision-making process is skewed by their own internal biases?

Below are three examples of the most common decision making traps according to Hammond et al. and how they impact both your cash management and your business as a whole:

  1. The Anchoring Trap: When making a decision, our minds often give preference to the first information they receive. In business, this means that we’re likely to hold onto initial reports, evidence or sound bites, anchoring them as fact and carrying these beliefs with us through subsequent decision making processes. When making key strategy decisions around your cash management, you may well be falling into the anchoring trap by recalling those punchy headlines warning of “the cashless society” or that “cash is dying”. But is this really the case?
    A number of recent studies have actually advocated the continuing prevalence of cash as a primary payment method. And, for businesses looking to streamline operations and cut operational costs – ignoring the importance of an effective cash management solution could prove costly. To avoid the anchoring trap, be open-minded. Ensure you perform independent research and due diligence. Gather data from your own business and consider a wide variety of evidence and opinions rather than basing your decision on the information closest to hand or attention-grabbing headlines.
  2. The Status Quo Trap: The second bias that could be negatively impacting your decision-making process is the Status Quo Trap. This refers to the idea that we’re all creatures of habit. Keeping things just as they are is a powerful motivator for us and we tend to weigh this heavily when making decisions. In business, when the stakes are high and the risks are even higher, it’s human nature to fall back on tried and tested strategies and processes, often either for self-preservation or risk-avoidance. And when it comes to cash management, business leaders and cashiers alike are at risk of falling into this same trap.
    Do you process your cash in a certain way because that’s always how it’s been done? Do you follow the same tried and tested processes, or rely on the same outdated cash management technology – or no technology at all? In this instance, doing nothing can be just as risky as doing the same old thing. To avoid the Status Quo Trap, be sure to review and refresh strategies, processes and resources frequently. Make sure that if you’re keeping things the same, you’re doing so because it’s genuinely the best choice and not because it’s the easy option.
  3. The Sunk-Cost Trap: In business the sunk cost mentality is perhaps one of our most powerful motivators when it comes to making decisions. It means that we’re unlikely to abandon an idea or project that we’ve already heavily invested in – whether that investment be time, resource, or cost. Hammond et al. suggest that we all have a deep seated sunk-cost bias, meaning that we tend to make our choices largely to help justify past decisions – even if these past decisions no longer seem like an effective solution.
    In my experience, the Sunk-Cost Trap is an increasingly common pitfall that businesses are succumbing to when it comes to their cash management. After spending many years investing huge amounts of money, time and resource into both electronic and mobile payment programmes, investing in cash management can seem counter intuitive for many. And, as the sunk-costs accumulate, the decision to shift focus becomes a much harder one to make. But, this mentality can be extremely detrimental for your business. The importance of an effective cash management process that mitigates cash loss, streamlines operations and saves money is paramount for businesses leaders looking to cut operational costs and protect profits. Choosing not to invest in, or even to neglect your cash management processes can lead to errors or inefficiencies that have a measurable impact on your bottom line.

These three examples show just how our biases affect our decision making processes. From misconceptions to assumptions, each and every one of our choices is impacted by the world around us and our experience of it. In business, these decisions are influenced not just by our own impaired perceptions, but by other peoples’ too. And, the more important the decision, the more likely it is that the decision will be reached founded on previous biases.

When it comes to your cash management, this can mean that your business will fall into the trap of stagnant processes and strategies that simply perpetuate the status quo. Plus, driving change in this area could prove difficult with innovators facing tough opposition from others due to anchored beliefs that cash management is no longer a key strategic area for businesses.

To combat this, it’s important to present the cold hard facts. Reassess and re-evaluate your cash management strategies and processes frequently, and don’t be afraid to look for new solutions or technology to improve or streamline your cash management.

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