Maths for managers

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Maths make some people break out into a cold sweat, others start drooling with excitement. An MBA course makes all managers sweat the numbers and the maths. Here are ten ways in which you can drive business thinking into the numbers you are presented with:

  1. Work the assumptions not the maths. You know that the spreadsheet in front of you will have been created from the bottom right hand corner upwards. People start with the answer and then create assumptions to fit the desired answer. You need to unpick the assumptions behind the spreadsheet. And if the assumptions are not clear in the spreadsheet, do not be bamboozled by complexity. Insist on seeing a simpler version which highlights the real assumptions and variables.
  2. Test the what-ifs. Try different scenarios with different assumptions and see what happens to the projections. Let your spreadsheet do all the number crunching.
  3. Remember the sacred numbers and reject the silly numbers. You should know your business and your core numbers: staffing levels, key budget line items. If you see numbers which look odd, they are odd. Check them against your sacred numbers to see if they have got the basic inputs right.
  4. Don’t be seduced by the average (mean, mode or median). The average human being is 52% female and has slightly less than two eyes and two legs (go figure that). There is no such thing as the average human. From a business perspective, outliers and segments are much more interesting than averages: they tell you more about your business and its opportunities.
  5. Maths is an aid to thinking, not a substitute for thinking. The clear answer on the spreadsheet looks definitive, but it is not. Keep your business brain engaged. For instance, your analysis shows lower prices leads to more sales and possibly higher profits with economies of scale; but perhaps they also cheapen the brand, get the customers used to lower prices and invite competitive retaliation so you land up far worse off. Good maths can be the enemy of good thinking.
  6. Compounding is the most powerful force in the universe (if an unlikely statement attributed to Einstein is to be believed). If your business grows at 10% pa, it will double in seven years and grow to be 128 times its current size in your glorious fifty year career. And if one of my ancestors had put $1 aside for me at the time of Christ at a miserly 2% compound, I would now own the entire planet (about $200,000 million million dollars value). Never believe a trend will last forever.
  7. Understand causality: is violence on TV a cause of violence in society, or is violence on TV caused by the desire of society for action movies? Do happy employees cause firms to be successful, or do successful firms cause employees to be happy? The maths will show that there is a relationship, but will not show which is the cause and which is the effect. How you decide determines how you act.
  8. Scale counts so think big. How can I sell detergent for $5 when the required advertising costs $10 million, plus all the sales costs, overheads and R&D before we even start on producing the product and paying for the raw materials? If I sell 100 million units a year, I can afford all this and make a big profit. The same goes for selling phone calls for a few cents a minute or many other businesses: scale changes everything.
  9. Model your business. Every business has a simple financial model behind it: understand that and you understand how to make your business more profitable.
  10. Forget the advanced maths.Keep it simple. If you are doing Bayesian analysis and Chi square distributions you:
    1. Are pretty smart
    2. Have remembered more of your MBA than most people
    3. Are not the CEO or in the C-suite, and might never be
    4. Are wasting time: you can always find specialists who will do this faster and better. And the results of your analysis are unlikely to be appreciated by your bosses who have not got a clue what a chi squared distribution is and will want a simpler analysis they both trust and understand.

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