I wrote this article after a gruelling discussion about numbers with persons who always want to know better (and who, incidentally, are wrong about) how to interpret numbers.

Here are a few and provocativebusiness theses.

  • As a general rule, you cannot come to useful conclusions about strategy and the application thereof from looking at past and current numbers.
  • Planning the future of an enterprise in the form of a “budget” is not conducive to entrepreneurially correct behaviour. In fact, it is counter-productive.
  • Numbers about an enterprise might actually help you to discover where money was wasted.

Here some comments:

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The business analysis of a month or year consists of a profit and loss computation and a balance that has to equal the sums of the G&V (and vice versa). In addition, there is mostly any number of “boss overviews” regarding product groups, branches, purchase classes, employee types, special situations and much more. More often than not, you can not see the wood for the trees. It is a true orgy of excel sheets.

For entrepreneurial control, however, what counts are not the numbers, but the reasons why the numbers are such as they are. You cannot tell those if you only have the numbers. The only way to know them is from the past and from the stories of the enterprise.

Evaluating the quality of managerial decisions on the sole basis of numbers will almost inevitably give you a result that has next to nothing common with reality.

To be sure, some people like to reduce their considerations to numbers, because this method makes it easier to describe and discuss reality. However, it is a grave mistake to believe you can represent reality in numbers, because the entire context is lost. Sometimes it is actually still partially available inside your head, but the power of the numbers will quickly push it into the background.

Consequently, a mere analysis of numbers will usually lead you astray and give you the wrong results. Moreover, small modifications of rules (for instance cost distribution) will easily cause new statements and images. Thus, evaluation mistakes and wrong conclusions are promoted by too many “numbers”. The management biases, namely too much distance from reality and misconceptions, are promoted.

To be sure, once in a while the final result after interpreting numbers might actually be correct. Just like a wrong hypothesis can give you correct conclusions and results.

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The orientation of managers in an enterprise must be along the lines of the internal world with its complex organisation and perhaps even more complex environment. It is quite impossible to follow predictions at the same time. Basically, the numbers are just something that tries to predict external and internal happenings at the enterprise.

In addition, you have many more or less relevant “disruptive happenings”. They might balance each other, but that is not always the case. Consequently, there is quite a bit of cheating going on – and the results are bent according to necessity. But cheating also causes extra cost. Just like the obligation to fulfil a plan will quickly result in wrong decisions. You can easily see this if you take the example of attitudes. If, for instance, your highest priority is meeting the requirements of a plan, you often get poor quality, thus missing out on the best chances.

To be sure, planning is not useless. You would, however, be well advised to just see it as a “simulation” that shows you under what conditions the enterprise has a chance to manage something during the “planned” period of time. But that should be it. As to the rest, you should do without planning and, last not least, without control by rewards for those who actually managed to deliver!

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You should (always!) avoid waste. Numbers may show you (even if mostly they can not even do that sufficiently) where money is wasted. But the numbers alone will not tell you how to save money at the right place in the future.

Conclusion:

It is an antiquated assumption that an enterprise can be controlled through numbers and logic. Until the mid-1950ies, economic studies actually taught that an enterprise had to be oriented in that way in order to make it easy for the management to control everything.

Today, this is pure nonsense. Enterprises still following that pattern today loose markets and influence. And new enterprises gain them at breathtaking speed.

RMD
(Translated by EG)

3 Kommentare zu “Entrepreneur’s Diary #62 – Reading Numbers, Following Numbers!?”

  1. Chris Wood (Monday January 9th, 2012)

    Strange that the situation, from my “worm’s eye” view, for decades has looked just the same as you see it, (from your bird’s eye view). I keep telling Zuzana not to take her sales targets too seriously. Is my deep understanding of management the reason why you never offered me a job?

  2. rd (Monday January 9th, 2012)

    Hi Chris,

    vielleicht sind wir beide uns zu ähnlich 🙂 Du weißt doch, zwei Hähne …

    Lieben Gruß!

  3. Erna Lucia (Thursday October 27th, 2016)

    Nicht streiten Jungs!

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