Numbers are symbols, very much like words, with their own intrinsic simple meanings when they stand alone. When in context with other numbers they become far more complex and meaningful. What is often not realized is the extent to which insights can be made regarding the ins and outs of you business by having insight into the accounting details of your business.
In business, numbers are the symbols by which you measure the various activities of an individual enterprise or combination of enterprises which make up the parent corporation. When you add and subtract all the numbers, you come up with the well- known ‘bottom line’: the profit or loss that your business is making on your profit-and-loss statement. That’s very simple, but to establish whether you did better or worse you need to look at the figures in “relative” terms.
If your business shows a profit of $10 million for the year, is that good or not so good? That depends upon the context of that $10 million. Did you earn $8 million or $12 million the year before? Did you earn $10 million on sales of $40 million or $400 million? Your insight is now increased by relating the numbers to other numbers.
The meaning of numbers, like that of words, can only be comprehended in relationship to one another. When I read sets of numbers, you should always translate them into meaningful percentage differences. Thus, if $100 million in sales dropped by $10 million, I know that sales dropped 10 per cent. If $50,000 in sales of another division decreased by $10,000, it tells me the drop was 20 per cent. Even though this division lost less money than the first, I immediately recognize that it is probably in deeper trouble than the division that lost $10 million in sales.
I can therefore identify the areas of the business needing more attention. The figures tell me that I had better look behind those numbers and find out what is happening there.
The numbers are not the business; they are only pictures of the business, but most people think of accounting as providing dry data that is dry and boring. They do not realize that if you become literate in the language of accounting you can be set free by getting an in-depth picture of the organization and this carries the secret of management information used to proactively manage your business.
The difference between well-managed companies and badly run companies is the degree of attention they pay to the numbers and how well they are capable of interpreting the numbers and how effectively they can predict how to apply the available resources.
Make sure you know the vocabulary of accounting to the extent that you can read them like a book. You will then get freedom though the numbers.