Topic: Accounting


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How to Avoid Vanity Metrics: Getting Under the Hood of Business

VanityMetrics

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Mental Models Used: ,

Most organizations have analysts reviewing financial and operational information on a regular basis – the objective being to gain some kind of meaning from information, and to capture that meaning with a metric or metrics.  Analysts are generally providing descriptive information (telling us how we’ve done) or predictive information (telling us how we suspect we will do).

But many commonly used metrics don’t provide any actionable insight.  In other words, they’re just for show.  These are called vanity metrics.  Other times metrics don’t properly measure the underlying data, potentially resulting in what only appears to be a valid metric on the surface.  This is called an Isomorphism.

A metric is only as valuable as its ability to decipher underlying data.  When metrics are properly developed and implemented, they become meaningful because they capture the drivers that lead to the behaviors and decisions desired.

A great resource for understanding metrics is the book Lean Analytics.  Although geared to start-ups, the logic used is widely applicable to organizations large and small.  You will find much of this logic in the following paragraphs.  Read More »

Giving Information Meaning: The Rise of Business Analytics

BAnalytics

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Business Analytics is the scientific process of transforming data into insight for making better decisions.  Data doesn’t always cooperate with this process, as it is often massive and messy.  But no matter what condition data is in, we use business analytics to make decisions with it.

In order to make these decisions, we have to understand the ultimate value that various combinations of this data can present.  So, we measure it.  That is, we measure what data carries: information.  Measurement is what informs uncertain decisions, and almost all decisions are made under uncertainty.  Read More »

There’s No Best Age to Start a Business: The Story of Sam Walton and Wal-Mart

Walton

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After graduating from the University of Missouri in 1940, Sam Walton took a job with J.C. Penney.  He was 22 years old.  He spent five years with J.C. Penney learning the retail industry.  In 1945, Walton became an entrepreneur and bought a Ben Franklin variety store in Arkansas for $25,000.  He was 27 years old.  Walton spent five years growing his Ben Franklin store.  But in 1950, after Walton’s landlord refused to renew the five year lease he had on the Ben Franklin store location, Walton had no choice but to sell the franchise.  He sold it for a fair price, and then had to start all over again.  Walton was now 32, and it was at this age when he opened his first Walton’s Five and Dime (again in Arkansas).  But it wasn’t until he was 44 years old that he opened the first Wal-Mart.  It was a very gradual progression.  So, does age really matter when starting a business?  I doubt it.  There is no best age to start a business, no perfect time – none of that.  And Sam Walton is the perfect example of this.  Read More »

How to Understand Accounting: Translating Geek to English

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Topics: Accounting
Accounting Pic

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Accounting is needlessly complicated.  And there is often a huge communication barrier between the Accounting department and the rest of an organization.  Maybe that Intro to Accounting class was supposed to help you understand the difference between Debits and Credits, but in my experience, very few (if any) people actually retain this concept.

Debits and credits are part of Double-Entry Bookkeeping, which can trace its roots back to the ancient Greek mathematicians – it’s just a simple Algebraic equation.  But the concept was first codified and published by an Italian Friar named Luca Pacioli in 1494.  It seems pretty clear that Pacioli was using this system as a tool concerned mainly with who owed what to whom.  And there was clear benefit to this system.  Each transaction had to balance out (the debit side equaled the credit side); double-entry bookkeeping is one of those closed systems that must always be in balance.  It forced discipline, it forced transparency, and it forced honesty.  And while this system originally created great virtue effects, those effects are not quite so clear today.

So in order to understand Accounting, we first have to overcome the following aspects of it:  Read More »

Metrics: The Measurements that Control the Masses

Metrics

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We are being controlled.  Of our own free will of course, but nonetheless, our thinking is completely manipulated by society’s chosen metrics.  If society defines inflation as the CPI Index, everyone defines inflation that way.  If society defines growth as an increase in GDP, everyone defines growth that way.  We are all puppet’s to society’s metrics.  And if we try to escape it, who will understand what we’re talking about, anyway?

Of course, there are occasionally people who create their own metrics – people who take the time to figure out what drives the results they want to achieve – people who know the system isn’t quite right.  And those people are usually rewarded.  Read More »

But What If It Isn’t Cool?: The Story of Eric Ries and IMVU

IMVU

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Eric Ries, with a few others, started a company called IMVU in 2004.  As in IM (Instant Message) VU (view) – the novelty of the concept was the introduction of avatars to instant messaging.  He tells his story through the following five core principles of the Lean Startup Movement:

  1. Entrepreneurs are everywhere: in other words, the constraints to being an entrepreneur are minimal, if they exist at all.
  2. Entrepreneurship is management: or, a start-up requires a different set of management principles than a mature company does.
  3. Validated learning: One of Ries’ core concepts, basically stating that start-ups exist to learn how to build a sustainable business
  4. Build-Measure-Learn: a critical feedback loop that Ries developed – he advocates that all successful start-up processes should be geared to accelerate this feedback loop
  5. Innovation accounting: traditional accounting doesn’t properly measure what matters to him (and on this, I wholly agree with him), so he set up a different process to measure progress, set up milestones, and prioritize work.

Eric and his colleagues eventually grew IMVU to annual revenues of more than $50 million in 2011 (and some level of profitability, which he doesn’t disclose).  It’s important to note, however, that Ries is in no way shy about admitting the repeated mistakes that he and his team made at the outset.  You can read all about his adventure in The Lean Startup.  One of the more amusing issues was the unwillingness of test users to tell their friends about it.  After all, it was new to them, and they weren’t quite sure whether or not it was cool.  And as well all know, it’s totes obvi that you gotta protect your rep.

Of course, there is another way to look at what Eric did to create his organization.  Eric’s success can also be deciphered through mental models…   Read More »