By Bryan Orr
You have inevitably heard it said: “The numbers don’t lie,” and by that they mean that a business can and should be managed by the numbers. This is generally true, but there are some cases where managing by the numbers can lead you astray.
Numbers That Are Too General
Many times a business owner or manager will look at very broad numbers, like profit margin or overhead percentage and proceed to make pricing, budget cuts or expansion plans based on the idea that these numbers will remain consistent as changes are made. Often these numbers may lump together profitable segments with unprofitable segments leading to a core misunderstanding of how to move forward.
It is often better to look at narrow, small data sets when making a decision. For example, in our business we look at profit per hour by segment, and individual employee instead of looking at overall profit margin when it comes to making pricing decisions and doing employee coaching.
Applying Large Expenses at One Time
There are some large expenses like insurance that you may pay for at one time but you benefit from throughout the entire year. If you do not account for these big expenses in your bookkeeping software and spread it out equally in each month, you are going to have some periods where you think you are doing better than you are and other periods where it looks like you are doing worse.
Take all yearly or bi-yearly expenses like license and regulatory fees, insurance and large marketing contracts and break them up by month so that your P&L provides you with useful information instead of confusion.
Capital expenditures are big purchases that you benefit from for an extended period of time, usually for YEARS. When you make a capex purchase (like a vehicle), that expense goes on your balance sheet and it usually depreciates over a number of years.
However, capex purchases still do affect your cash on hand and they do not show up on your profit & loss statement. If you don’t remember to account for capex you can end up thinking you are doing better than you actually are and accidentally overspend.
Make sure to keep an eye on your cash position and capex expenses along with your P&L so you don’t get stuck in a bad position.
When you look at a number like overhead percentage and it begins to increase, it could be easily concluded that the best course of action would be to cut overhead to decrease the percentage.
However, it is often the gross revenue side of the equation that can cause the increase in overhead when the revenue decreases. In some cases when an owner sees a rising overhead percentage they may cut back on sales and marketing which can result in further decreasing revenue and even higher overhead percentage.
Growth and cutbacks have the potential to both increase or decrease overhead and profit depending on the specific details of your business. If you are only “managing by the numbers” you can miss the nuance and make a poor choice.
Relationships Don’t Show Up In Your Financials
There are many times that the best decision you can make on paper is NOT the best decision you can make for your business. There have been many times in my business where the NUMBERS indicated that we should lay off some of my staff. Whether it was a trend towards decreasing activity in a segment or just a really bad quarter, That’s an answer that would make sense by the numbers.
By working through a hard time with the staff you have, you demonstrate your commitment to your staff. However, when you develop relationships and loyalty you often find that these intangible currencies are worth much more than money and actually result in more profitability in the long run.
The bottom line is important, but it’s not always money; that’s the bottom line. Make sure you have a practical understanding of your business. Pay attention to numbers, yes, but it is the marriage of numbers and practical wisdom that make a business truly excellent.