Oh, those tricky numbers!

Posted by Laddie Blaskowski on May 07, 2008

I’m a numbers person. I love looking at them because numbers tell me a story.

When I was a commercial banker, one of the senior lenders told me, “If you’re trying to determine whether to want to work with a company and want to know what’s really going on, you look at the numbers.” I took that advice to heart but as time went on and I analyzed more companies, I realized that numbers can be tricky and don’t necessarily tell the story.

Sometimes companies with seemingly bad numbers can actually be good companies…or are on their way to being good companies. Or bad companies can have numbers that look good until you dig a little deeper. From the standpoint of a business owner, numbers can sometimes trick you into thinking the situation is something that it’s not.

Simply looking at your hard financial data can cause real problems if it masks other things that should be analyzed.

Here are some reasons why numbers in your business can be tricky:

You’re looking at too many numbers. Computer programs and accounting systems can crank out tons of useful information but can result in “information overload.” Just looking at reams of financial data doesn’t give you the full picture of how your company is doing or how you can expect to do in the future.

You’re looking at too few numbers. If you don’t analyze enough financial data, it can make it difficult to make a decision or see what the information is really trying to tell you. If you’re only looking at sales, costs and net profit, you may not be getting an accurate picture of how your business is doing. We often help our clients perform what we call “Financial Dissection,” which involves splitting the business into the financial pieces of the company, such as divisions, offices, product lines, and expense breakdowns. Breaking the financial data into different categories often tells an entirely different story.

Thinking your past numbers predict the future. Although your past numbers can be an indicator, they can’t solely predict future performance. Your future is far more strongly impacted by the things you’re doing to get sales, control costs, and increase efficiency and effectiveness. Outside influences, such as rising costs, market changes, customer preferences and competition can also have a significant impact.

Your numbers are only giving you the symptom and not the problem. Say your gross profits are going down. You might initially conclude it’s because your costs have increased or your prices are too low. But it might be due to an underlying cause that you have to look deeper to detect. Maybe it’s really because of outside influences or ineffective management. A lot of things can cause symptoms without revealing the underlying problem.

Now, I’m not saying that financial analysis isn’t important in your business and I actually love looking at financial data, but you need to be aware that numbers do not always automatically give you the answer. You can’t manage everything by the numbers and numbers don’t tell the whole story.

Financial data doesn’t tell you things that are hard to quantify and you could easily be leaving things out of your decision making process. Intangibles like employee morale, happiness, fun, and meeting your personal goals might be left out of the equation if you’re just looking at the numbers.

Albert Einstein said, “Not everything that can be counted counts, and not everything that counts can be counted.” This is something worth considering the next time you look at your numbers.

BusinessTruth®: Numbers can be tricky—don’t be fooled!