30 Dec Trusting the numbers: The Importance of Knowing the Art vs Science of Accounting
If you read the news regularly, you have learned a good deal in recent years about the wonderful ways
people find to cook their companies’ books. They record phantom sales. They hide expenses. They sequester
some of their properties and debts in a mysterious place known as off-balance sheet. Some of these techniques
are quite simple, whereas others approach near-incomprehensibility.
But maybe you have also noticed something else about the world of finance namely, that many
companies find perfectly legal ways to make their books look better than they otherwise would. Granted, these
tools aren’t as powerful as outright fraud, but it is amazing what they can do. But short of fraud, how can they
so easily manipulate the business’s bottom line?
Anybody who isn’t a financial professional is likely to greet such manoeuvres with a certain degree of
mystification. Most everything in business- marketing, R&D, strategy formulation, and so on- is obviously
subjective. But finance? Accounting? Surely, those numbers are objective, black and white, indisputable.
The fact is, accounting and finance, like all those other business disciplines, really are as much art as
they are science. Those of us outside of finance tend to think that if a number shows up on the financial
statements or reports, it must accurately represent reality. Of course, this can’t always be true, if only because
even the numbers jockeys can’t know everything. They can’t know exactly what everyone in the company does
every day, so they don’t know exactly how to allocate costs.
The art of accounting and finance is the art of using limited data to come as close as possible to an
accurate description of how well a company is performing. And it’s a tough job. Sometimes they have to
quantify what can’t easily be quantified. Sometimes they have to make difficult judgements about how to
categorize a given item. The result of these assumptions and estimates is, typically, a bias in the numbers.
This bias doesn’t mean the financial folks are trying to cook the books or that they are incompetent,
and please don’t get the idea that the word bias in this context is meant to impinge on anybody’s integrity.
Where financial results are concerned, bias means only that the numbers might be skewed in one direction or
another, depending on the background or experience of the people who compiled and interpreted them.
So why is it important for anyone who isn’t a financial or C-Suite executive to understand this? The reason, of course, is that numbers are used to make decisions. You yourself most likely make judgments about budgets, capital expenditures, staffing, and da dozen other matters- or your boss does- based on an assessment of the company’s or your business unit’s financial situation. If a decision maker isn’t aware of how the estimates and assumptions that underlie the numbers affect those numbers in one direction or another, your decision could be faulty.
Enabling you to understand this bias, to correct for it where necessary, and even to use it to your own
(and your company’s) advantage can be a valuable skill. To understand the numbers, you must know what
questions to ask. Armed with the information you gather, you can make informed, well-considered decisions
that can positively affect your performance as well as that of your company’s.
Source: Financial Intelligence by Karen Berman, Joe Knight and John Case. Joe Knight, and his
partners, Joe Cornwell and Joe Van Den Berge from Setpoint Inc. together have built two
companies with 25-year history of successfully implementing these principles in their thriving
businesses. Setpoint Inc. designs and implements custom rides and attractions for the top
amusement and theme parks in the world, and Setpoint Systems delivers custom automation
and robotics that helps manufacturers large and small improve the way they make and
distribute goods.
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