Go with Your Gut? Maybe Not. The Most Important Factor in Making Sound Business Decisions

It is no secret that I am a huge fan of reading and studying classical logic and critical thinking skills. It sort of speaks to me in a way that music speaks to musicians. The way a thought or an idea creates a window to how the world is operating around us is very addictive. (As a side note it is also no secret that education has shifted away from logic and critical thinking towards what is called “scientific” thinking even though the discipline of science is based on classic logic.)  

I note this because far too often in my interactions with business owners I find that their business logic is not really logic at all. Rather it is a random series of assumptions, gut feel, and emotion. It is astonishingly difficult to get meaningful data from a large segment of American businesses today. And I don't mean some sort of ‘deep analysis’ level of data. I mean a simple income statement or balance sheet. Or a list of customers and how much they have bought. In many ways and in many companies the accounting department is seen as overhead, and the goal is to spend as little time and energy on that function as possible.  

That becomes an enormous problem when we are trying to make better operating and financial decisions. If you do not have facts how can you possibly have opinions that make sense? I like the simple way blogger Natasha Crane lays it out. She calls it the FIA thought pyramid. The process is pretty simple. 

First you have facts. Afterwards you have interpretation of those facts. And those interpretations are used to decide personal applications and policy applications. In other words, we look at facts to determine what we personally think should happen and put that action into motion based on how we interpret the facts.  

Most arguments and disagreements stem from different underlying facts (or mis-identifying an interpretation as a fact), not about personal or policy applications. (It is pretty easy to see that much of the vitriol on social media confuses facts and interpretations like it was an Olympic sport.)  

With this point of view, let's go back to the first stage of our financial and operations decision learning model. What we simply call a financial statement review is ultimately a discussion about facts. In order to even discuss the facts, not even begin to interpret them, we first just need to have them.  

It is imperative in today's business climate to have sound basic financial information available in a  short time frame. The days of financial statements once a quarter or once a year are long over. Businesses need to design and invest in accounting in financial reporting systems to gain access to real-time data, or at least monthly financials available within 7 to 10 days every month end. Without it there is simply no way to progress forward in the decision layering model.  

I know many business owners will cringe at the idea of investing in accounting. Why throw money at overhead, right? If that thought popped in your mind, then you should know, it's certainly in the bucket of owners who make decisions based on gut feel and emotion, not data or facts.  

At this first stage all we want are the brute facts. What are the numbers? What do those numbers look like when compared to recent history? What happened in our business that caused these numbers to be what they are? What is the data?  

Notice we are not giving an opinion about these facts. Also notice we aren't even saying if something good or bad transpired we just want to know what transpired. Many of my clients find it extremely difficult to sit and talk about “the what”. Far too often business leaders jump into what they think it means or CYA mode. Unfortunately, until “the what” conversation becomes an automatic habit, the ability to discuss what it means or what we should do becomes nothing more than an exercise in emotional arguing.  

Let me give you an example. A client of mine has a subset of its management team who are thoroughly convinced the business is on the verge of disaster. As such, they share this opinion with anyone who will listen both inside and outside of the business. This personal application from the interpretation is based on the fact that their division has gone through some turmoil. Since they could see the turmoil (facts), and their interpretation is that there is nothing that can be done about the turmoil interpretation of facts) therefore, the business is going under (personal application), and we should all be in cost cutting/turnaround mode to fight off bankruptcy (policy application).  I was asked to do some analysis and see if the business is indeed on the verge of going under. It became clear very fast that the facts being used were not facts in the first place but rather interpretations. Not surprisingly I took some steps backwards and started with data. What are the current financial metrics? What do those numbers look like when compared to recent history? What happened in the business that caused those numbers to be what they are? What are the facts? 

The short answer when looking at facts was that the business was actually growing, not shrinking. The data was very difficult to accumulate due to poor financial systems and a lack of focus and investment in those systems over many years. As such the facts were truly hidden from the management team. Which left it open to confusing interpretations as facts. Further, it left them open to every manager feeling justified by their interpretation even when those interpretations were mutually exclusive to one another.  

The scary thing for many people reading this is that you are wondering if I just described your business. Although I did not, this scenario is so common that it could make your head spin.  

Let's just take a second to be brutally honest here. You do not need to be a CPA to do anything that we're talking about at this stage to have decision layering. You also do not have to be an expert in Aristotle or Plato. But the business owners who can decipher the difference between a true fact and an interpretation of a fact will be far ahead of those who don't even know how to access the facts7. Which is always head scratching to me, since virtually every business owner finds the enjoyment of owning a business in the interpretation and discussion around what the business should do next. Why do so many businesses start from the wrong spot?