Bad Math

Business and math are inextricably linked. Big data, income statements, turnover, weighted average cost of capital, customer satisfaction scores and quotas — just to name a few. And accuracy is vital. Don’t you dare make a miscalculation in a 10Q!

But accuracy and efficacy are two different things. I may have a bang-on measure of my cholesterol level, but it won’t tell me if I’m going to get the flu.

Leading through questions is crucial. Old-school leaders thought they always had to have the answers. They didn’t. What current leaders need most are the right questions. The right answer to the wrong question is always wrong for that situation, just like looking at my cholesterol numbers won’t help with my flu diagnosis.

So it is with numbers. Too often we don’t think hard enough about what we’re measuring and calculating. The correct calculation for the wrong measurement won’t help, and measuring the wrong thing can actually hurt. Below are a few mistakes that I’ve seen cause huge problems in businesses.

Measuring revenue versus profit. Are both important? Sure, but nonstrategic revenue or revenue with no margin is nothing to celebrate or reward. It’s easy to get into the “any revenue is good revenue” mode when under pressure. Hire a talented sales leader to build a team around generating revenue without tying it to strategy and profit, and you’ll get what you paid for, but you’ll be sorry.

New customers versus profit. Chasing new business when you have considerable unmet needs in your current customer group is often the result when sales targets go awry. Of course, you don’t want all revenue associated with a small number of customers, but retaining and growing current customers is often more important than finding new ones, and profitability is frequently higher.

Likeability versus effectiveness. This is one of the more dangerous ones. 360-degree surveys can be wonderful, but I’ve seen them turn a culture into one of “nice versus kind” too often. In terms of a raise, when it’s more important to be liked than effective, you’ll avoid conflict and be a sycophant rather than speak the truth. It’s wonderful (and effective) to have a collaborative, supportive culture, but when it supplants performance, all those nice people will end up unemployed when the business fails.

Profit versus cash. A young friend who sells insurance told me of a new prospect that was extremely profitable but out of cash, and he wondered how that could happen. His eyes rolled back a bit when I launched into an explanation of cash conversion cycles, depreciation and revenue recognition. Yours might too, but if you run a business, you damn well better understand them! It’s very possible to go broke while showing profit.

Profitability versus leverage. As we all know, using debt to fund growth in a profitable environment can significantly goose returns. (As Wimpy from Popeye said, “I’ll gladly pay you Tuesday for a hamburger today!”) Focusing on profitability without real concern for debt levels, however, can be a death sentence when you hit a bump in the road. Commodity prices drop. Demand shifts. A large customer fails. These all happened to clients in the past few years, and the debt that funded growth became a boat anchor. Debt is a useful tool, just like pain medication, but only when used effectively and sparingly.

What are the most important things for you to measure and quantify in your business? Are you sure?

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