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Insight

All Numbers Are Not Created Equal

If you are a manager of managers, you might be concerned about how your managers use financial numbers in their work.

  • Your managers are likely to be specialists in a non-financial function, like marketing, operations, or technology.
  • So, they’re likely to have little or no formal financial training.
  • They may not realize that all numbers are not created equally.

Here’s a simple example:  Let’s say that they see a revenue number like $100.

  • They may not realize that the $100 could represent a past transaction or a future forecast.
  • And so they may not realize what they can learn from it and what their role is in relation to that number.
  • To do so, they need to distinguish INSIGHT (the retrospective use of numbers) from FORESIGHT (the prospective use of numbers).

INSIGHT (THE RETROSPECTIVE USE OF NUMBERS)

Let’s assume your manager determines that the $100 captures past revenue.

  • Since it happened in the past, there’s nothing your manager can do to change that number. It’s water under the bridge. It’s locked in stone.
  • So, of what use is it to your manager?
  • The number should primarily be used for learning. Your managers should drill down to identify the business drivers of that number based on their familiarity with your customers, competitors, technology, production capacity, etc.

FORESIGHT (THE PROSPECTIVE USE OF NUMBERS)

Instead, let’s say your manager realizes that the $100 is a a forecast of future revenue.

  • Since it hasn’t happened yet, that number is a wisp in the wind. It’s a wish and a dream.  It’s a guess about the future.
  • Since there is no concrete reality to that forecast, there is little or no learning possible.
  • So, what is your manager’s role in relation to that forecast?
  • Well, forecasts are based on assumptions about future business drivers. These assumptions must be validated if they are to lead to effective decisions.
  • So to make effective decisions, your manager should identify the assumptions behind the forecast and then use their non-financial expertise about business drivers, such as your customers, competitors, suppliers, technology, production capacity, etc., to validate the assumptions.

In summary, all numbers are not created equal.

  • If a number is about past results, your manager should use it for learning.
  • If the number is a forecast, your managers should validate the assumptions before using it for their decisions and action plans.
  • Underlying both uses of numbers is the need for your managers to identify the business drivers behind the numbers and to apply their non-financial expertise to either learn from or to validate that number.

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