Numbers in financial statements are a record of your decisions, not a predictor

Numbers in financial statements are a record of your decisions, not a predictor of the future. They don’t predict your business. They predict your behavior. They are predictive to the extent that the quality of your decisions tends to decline if your business changes, tends to remain constant if your business remains constant, and tends to improve if your decisions improve. And the only way to demonstrate that your decision have improved is if your goods and services remain competitive in the market, and profit results from their sale. So, the numbers are a record of decisions. Look to your decisions for insight, not the numbers.

Why it is that numbers are so addictive to so many people that they inverse the causal relations, and seek insight in the numbers rather than the market is beyond me. I suspect it’s because it’s easier to rely on the false promise of certainty in those numbers, for some, and for others, that their reliance on those numbers allows us to evade the political confrontation that comes from the conflict between the battle for ideas and the organization necessary to execute them, and the constraint on collective resources where everyone in the organization seeks to use them for their own ambitions or fulfillment.

This is why organizations decline over time: In the organizational battle, the number-certainty-addicts, and rent-seekers win over the customer and market reflectors because of the difference in effort and risk between the two factions.

The CEO’s problem is to choose whether he will be part of the false-number coalition – a rent-seeker, part of the customer and market coalition – an innovator, or an arbiter between the two – an administrator. And from that decision all other decisions follow.