Absolutes and Business Wisdom

Both absolutes and business wisdom are relevant to operating a business. Just what does that mean?

Business absolutes are things like the balance sheet must balance. Wisdom involves things that you don’t have to do but that require the ability to discern what is best. An example of wisdom is whether to use 80/20 analysis of expenses to see where you can improve profitability.

Business Absolutes

When speaking of absolutes in a business environment I’m referring to things that must be a certain way. For example, when looking at the balance sheet of a company the total of the assets must equal the total of liabilities and equity. If this is not so it indicates there is an error in the financial records. Likewise, it would be considered an absolute that a company must make sales and must pay its bills. Granted, for a number of reasons a company may successfully avoid paying some bills or pay less than the full amount occasionally, but that is an exception. For that reason, absolutes are not the focus here. Rather, the emphasis of this article is on business wisdom. Yet, the example of not paying or only paying a portion of a bill represents a natural transition. Here’s why.

Is Avoidance Wise?

While a company may save a little money by not paying the full bill, ultimately this practice will likely harm the business. Vendors may simply decide not to sell to them. Likewise, a company may be absolutely within its rights to far underpay employees in relation to the market for their services, but in the long run this may be detrimental to the stability of their workforce and even cost them more as they constantly are retraining new employees. In other words, is it wise to delay payments or not pay vendors the full amount or to underpay employees? In these examples of absolutes and business wisdom I think we can safely say business wisdom wins out. Yet, this is still not what my main point is.

Business Wisdom

While we all realize there are certain absolutes in business that must occur (again think that a balance sheet must balance), there are many things that we do not have to do that would be wise to do. For example, we don’t have to do financial analysis but it is wise that we do perform at least some analysis. It is through analysis that we determine if expenses are growing disproportionately or if we are selling products that are not really making a significant contribution to profit. We also don’t have to analyze accounts receivable, but in order to avoid bad debt write-offs it is wise that we stay on top of receivables. A great way to do this is using the 80/20 rule which I wrote about in the posting 80/20 Rule for Receivables Management.

I’m convinced that many of the real opportunities in running a business are found in using sound wisdom. We need both absolutes and business wisdom. Unfortunately in the day-to-day rush of getting things done it is easy to avoid wise actions that can have dramatic impact on the success of a business.

So, what about your company? Do you take the time to just think about what actions are not required yet may none-the-less be highly wise? Do you use financial analysis to determine key performance indicators that can help shape your decisions? Do you use shortcuts like the 80/20 rule to identify the important things amongst the clutter of information available?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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