How the drudgery of numbers will set you free
Numbers are symbols, much like words, with their own intrinsic simple meanings when they stand alone. When they are in context with other numbers, they become much more complex and meaningful. What is often overlooked is the extent to which insights into the ins and outs of your business can be gained by gaining insight into the accounting details of your business.
In business, numbers are the symbols by which the various activities of an individual company or a combination of companies that make up the parent corporation are measured. When you add and subtract all the numbers, you get the familiar “bottom line”: the profit or loss your business is making on your profit and loss statement. That’s very simple, but to establish if you did better or worse, you have to look at the figures in “relative” terms.
If your business shows a profit of $10 million per year, is that good or not so good? That depends on the context of that $10 million. Did you make $8 million or $12 million last year? Did you make $10 million on sales of $40 million or $400 million? Your perception now increases by relating numbers to other numbers.
The meaning of numbers, like that of words, can only be understood in relation to one another. When reading sets of numbers, you should always translate them into significant percentage differences. So if $100 million in sales decreased by $10 million, I know that sales decreased by 10 percent. If $50,000 in sales from another division fell by $10,000, it tells me the drop was 20 percent. Although this division lost less money than the first, I immediately recognize that it is probably in bigger trouble than the division that lost $10 million in sales.
Therefore, I can identify the areas of the business that need more attention. The numbers tell me I better look behind those numbers and find out what’s going on there.
Numbers are not the business; They are just pictures of the business, but most people think that accounting provides dry and boring data. They don’t realize that by becoming literate in the language of accounting, you can set yourself free by gaining a detailed picture of the organization and this carries the secret of management information used to proactively run your business.
The difference between well-run businesses and poorly-run businesses is how much attention they pay to numbers and how well they are able to interpret the numbers and how effectively they can predict how to apply available resources.
Make sure you know accounting vocabulary to the extent that you can read it like a book. Then you will get freedom through numbers.