Are your financials misleading your decision making?

Context not just figures

Watching a documentary about the way the eye interprets colors and how it all revolves around context. The eye changes what it actually sees depending on the context. The way we see a colour depends on the context that surrounds the colour. See the image below.

FInancials in COntext

The small squares in the middle are the same colour. However, our brain interprets the colour differently due to the different colours or context surrounding them.

The same situation may arise when you are looking at your financials. You can be easily mislead if you aren’t looking at your figures in the correct context.

For example, a business made a profit of $80,000. However, the profit did not include the owner’s salary. If the owners salary had worked somewhere else they would have earnt $100,000. When looking at the profit within this context, the owners lost $20,000 in opportunity cost to operate the business that year.

Obviously this is a simplistic view of the situation as it doesn’t take into account such factors as capital gains, lifestyle etc. However, it does highlight the point that you need to view your financials in the right context. If you don’t, you may be making decisions based on misleading information. This may cause you to use the wrong strategy in your business.

Strategy is like the gears on a bike. If you are using the wrong gear it will feel like you are working hard but going nowhere.

Here are some other examples of viewing your financials in context.

  • Increased Sales – With the GFC many small businesses have come to the realisation that increased sales does not automatically mean increased profit. Focusing on increasing sales can often lead to a decrease in profit.
  • Industry benchmarking – Ensure you are comparing yourself to the best in your industry.
  • Environment – Comparing how things were going five years ago may not be all that relevant. Today’s market place is changing rapidly. Comparing your margins to five years ago may be irrelevant due many different factors such as your product range has changed significantly.

So always remember when reading reports to think about the context the reports have been developed in.

For more information on how you can grow your business, you can call me for a no obligation and informal chat to discuss your situation on 0434 972438 or Contact Me.

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