Dangerous Formulas

Published by Lex on

Businesses are littered with dangerous formulas.

Sometimes the formula is the basic business equation. What you sell, how many you sell and at what margin…The formula is more complicated than that, but that is the basic idea.

If any of the variables in that formula change, the business results change. It is pretty simple.

However, in order to get a better picture of reality we add in more details to the formula. Inevitably, the more detail you add, the harder it is to model.

The spreadsheet becomes more complicated and the leverage from variables is inflated. This leads to all kinds of sub-optimal decisions.

You focus on the wrong variable and that could even show positive short term results which only reinforces the loyalty to your original thought process.

Months or years down the road when business results change for the worse, you are unlikely to look back at the earlier decision.

Formulas are dangerous because they simultaneously oversimplify and overcomplicate matters.

Unless, you are Coca Cola or something like that, perfecting the formula is not a particularly good use of your time.