Blue sky thinking, measuring and managing

Close up on the Rocks with a Small Tree - Snow Canyon UtahI suspect that few business ventures are started without a large element of  optimism and passion rather than business analysis of market trends or obvious gaps in the market. However some people take ignoring the facts of business life to dangerous extremes.

I was recently at a business event when a business owner stated

“I’ve been trading for two years but I don’t know if I’ve made a profit. I’d rather not know.”

Well after I’d got back on my chair (eek – the taxman?) I realised that that statement was perhaps an extreme example of a phenomenon I’ve often experienced in business.

This woman’s business was her passion, her baby, and she didn’t want to be told it was not a success. She wanted to keep on going regardless.

This attitude is not confined to small start-up businesses. Anyone who has worked at a senior level in finance will recognise that sometimes business decisions are based on criteria other than business analysis and logic. Basically a decision is reached and then the search is on for facts and numbers to support that decision.

I am not suggesting that the numbers are everything. Many successful businesses are the result of an inspired idea. Remember, for example, Friends Reunited which was launched by a husband and wife team in 2000 and sold five years later for £120 million? At inception no amount of modelling would have predicted that level of success in so short a time frame.

However it’s important to look at numbers while realising that there is an element of (subjective) judgement in any numerical analysis. By all accounts the disastrous takeover of ABN- AMRO could have been averted had there been a proper inspection of the figures (due diligence) relating to that bank. Management of RBS were motivated by the desire to build an even bigger empire and chose to put that imperative above commercial caution.

Whatever the motive for a business strategy, in the long run, that business needs to make a profit. If revenues do not exceed costs then effectively the business is paying its customers.

All business carries risk. However plunging in blind or with false assumptions can only waste precious time and resources. Business needs to have the facts and figures in order to make informed choices. Those choices will always be a matter of judgement but ‘what is measured can be managed’. It is a better policy to measure what is actually happening and then to model possible future scenarios. The future is uncertain but informed risk is better than ignorance or basing decisions on biased analyses.

 

I’d be delighted if you have any comments or questions. To read about me click here. To contact me click here.

 

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