Chapter Nine: Finance; September 24
“How many loaves do you have?” Jesus asked….
|Even If the Numbers Add Up, Is The Real Story Told?|
Every morning, I provided my boss a list of 46 vehicles which were immediately available and which ones were ‘deadline.’ I wrote the numbers down with a grease pencil on a clipboard overlaid with clear acetate.
This was the analog Army decades before information went digital. It was my job to get the numbers and to get them right. My boss needed numbers.
Business author, Bob Briner, writes,
An effective leader knows the extent of his resources. And he is willing to ask the necessary questions in order to know. He doesn’t rely on guesswork. He gets the numbers from the ones who know. (Bob Briner 1997; 2008)
Numbers can sometimes be impossible to get. During WWII,
Within the newly formed Army Air Forces, chaos reigned. When for example, General Henry “Hap” Arnold, commanding general of the Army Air Forces, had trouble figuring out just how many personnel were under his command, four different sections offered four estimates. Typically, Arnold selected the two that came closest to agreement. (Gabor 2000)
It was the best that the general could do. He had to assemble input. Gaming the numbers is often described as “torturing the data until it confesses.” What Management Is: How it Works and Why It’s Everyone’s Business, Joan Magretta, Free Press, 2002. Page 178. But this is no way to run the figures.
The sage would say that there are really only two numbers to water board: revenues up; expenses down.
The former GE CEO Jack Welch gives simple performance controls, “The three most important things you need to measure in a business are customer satisfaction, employee satisfaction, and cash flow.” But, Welch would continue, “Too often we measure everything and understand nothing.”
Joan Magretta, in her book, What Management Is: How it Works and Why It’s Everyone’s Business, points us to Albert Einstein. He would agree with Welch, “Not everything that can be counted counts, and not everything that counts can be counted.” (Margretta 2002)
And not all numbers are equal. Like the creatures in George Orwell’s book, Animal Farm, some numbers are more equal than others.
Investor Richard Koch writes that the manager needs to discriminate from among his varied concerns. He reminds us of the simple formula in Pareto’s principle,
[N]early all businesses have within them chunks of business with widely varying profitability.
The 80/20 Principle suggests something quite outrageous as a working hypothesis: that one-fifth of a typical company’s revenues account for four-fifths of its profits and cash.
Conversely, four-fifths of the average company’s revenues account for only one-fifth of profits and cash. This is a bizarre hypothesis.
If we assume that one such business has sales of $100 million and total profits of $5 million, for the 80/20 Principle to be correct $20 million of sales has to produce $4 million of profits—a return on sales of 20 percent; while $80 million of sales has to produce just $2 million of profits, a return on sales of just 1.25 percent.
This means that the top fifth of business is sixteen times more profitable than the rest of the business.
What is extraordinary is when it is tested, the hypothesis generally turns out to be correct… (Koch1998, 2008) Italics in original.
What to count, how to count and is it important? This is the wisdom and judgment managers get paid for.
“How many loaves do you have?” Jesus asked….Mark 8:5a