Good Number Or Bad Number?

I regularly see business people forming judgments about whether a number is good or bad without examining the context for the number. The following illustrates how difficult it is for we humans to overcome our natural tendency to judge.

Natural tendency

In my Financial Awareness & Strategy program, I provide students with ratios on The Mystery Works Company. I instruct them that when asked “Is this a good number or a bad number?” to respond with “I don’t know. I don’t have enough information.”

As I present each ratio, I ask “Is this a good number or a bad number?” It normally takes four or five ratios before I begin getting the correct response from the class. It’s human nature to form judgments quickly…a tendency that doesn’t often serve us well. Here’s an example from the class to illustrate the importance of context for the numbers you’re seeing.

Example

I intentionally set the Average Days’ Sales Outstanding at 10 days. In other words, it’s taking the company, on average, 10 days to collect after it has billed a customer.

When I ask the class if that’s a good number or bad number, they unanimously shout “It’s a good number!” despite the fact that I instructed them to say “I don’t know. I don’t have enough information.” They base their judgment on the fact that many companies collect in 30 to 45 days with some industries going out to 120 to 180 days.

To get them out of the habit of making quick, uninformed judgments, I then ask them “What would make this a bad number?” Here are some responses I get:

If payment was “due on delivery,” 10 days is not good.

If the company has one big customer that represents 90% of their business and the customer agreed to pay in 5 working days in exchange for getting a lower price, the 10-day average collection period masks the high level of risk the company has embraced by having one major customer.

The low 10-day average could be the result of overly aggressive collection efforts, which risks losing some of the company’s best customers.

The company’s credit underwriting standards may be set to accept only the crème de al crème of creditworthy customers thus forgoing a significant amount of profitable business that could be obtained with minimal additional risk.

What I want students to realize is that numbers have no meaning without context.

Financial Awareness

As students begin to see the importance of context in evaluating the numbers they’re seeing, they become more critical in their thinking and less inclined to form quick judgments about the numbers they’re seeing.

Takeaways

Numbers without context are meaningless. They often lead to poor, very costly decisions.

Since postponing judgment isn’t something that comes naturally to any of us, we have to train our minds to avoid judging the numbers we see and, instead, ask questions that afford us context with which we can reasonably and effectively evaluate the number.

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If you’d like the leaders in your organization to learn how to use the numbers more effectively and dramatically improve the productivity of your workforce, contact me to learn more about these resources:

Resources

Making the EXCEPTIONAL Normal program helps you identify and nurture emerging leaders who elevate all around them to higher levels of performance and greater job enjoyment.

Financial Awareness & Strategy program where employees learn to identify opportunities to improve financial results and prioritize these opportunities on the basis of which produces the greatest impact with the least effort. Greater financial awareness = Better decisions.