The Mathematics of Business Explained

Jul 8, 2011 by admin

By Jim Straw –

Get out your slide-rule … this month I’m gonna give you a lesson in analytic mathematics. — Okay, okay … forget the slide rule.  You won’t need it any way.  Besides, I don’t know if they even make slide rules anymore … when a $20, hand-held, calculator can perform more functions, more reliably.

As a kid, I was a ‘nerd’ … before being a nerd was cool; even before computers. — As a ‘math whiz,’ I carried a slip stick (slide rule) in a sheath on my belt, acted in the theater group, and was one of the most accomplished trumpet players in the state competitions for my age group. — I sung songs, both solo and in chorus, too, but a ‘bass’ has a hard time competing with the more socially acceptable sissy tenors … even though I did have an effective three octave range (only slightly falsetto at the top).

When I went off to college, I opted for a double major … Mathematics and Music (with a minor in Physics); music being nothing more than a mathematical progression of sound. — If you don’t believe it, ask any computer programmer.

During the first semester of my Sophomore year, the Dean of Men summoned me to his office to find out how and why one of his students came to class in three-piece suits and drove around campus in a new Oldsmobile … while most tenured  professors drove to work in five-year-old Fords. — After telling him about the ‘businesses’ I owned and operated on and off campus … established during my Freshman year … he admonished me to quit college, do what I already knew how to do, and ‘hire’ the students he graduated.

The rest is history … my history – but – my background in mathematics has served me well over the years because …

Business Is A Mathematical Game!

Think about it! — Any time you have an activity that can be reduced to numerical equivalents and annotated … general ledgers, balance sheets, profit & loss statements … you can effectively use those numbers to generate operating formulae, extrapolate progressions, and determine the relationships between various elements of costs and revenue.

Unfortunately, all too many erudite business professors and over edjerkated business people attempt to use the ‘numbers’ found in the “Financial Statements” of a business to generate operating formulae, extrapolate progressions, and determine interactive relationships. — It doesn’t work, because the “Financial Statements” of any business contain too many numbers that have absolutely nothing to do with the “results.”

In mathematics, only those ‘numbers’ that have a direct impact on the ‘result’ need to be considered.

Remember, back when you were in school, the teacher would ask you a silly question, like:

“There are 17 girls in our class.  Of the girls, 7 have brown eyes.  The teacher  is over 6 feet tall.  There are 16 boys in our class; 3 of them have blonde hair, one is red-headed, and the rest are brunettes.  The classroom has 36 student desks and 1 teacher’s desk. — How many people are in our classroom?”

(The answer is 34.)

The purpose of that silly question was to teach you to only use the ‘numbers’ and information that had a direct impact upon the ‘result’ in order to find the right answer to the question, “How many people are in our classroom?”

Silly questions like that were asked to teach you to FIRST determine ‘what the question was’ and, then, use only that specific information, given in the body of the question, directly related to that question, to find the right answer … the ‘result.’

Business Financial Statements are like the information contained in the body of your teachers’ silly questions. — All of that information has ‘something’ to do with the business – but – too much of it is “tax accounting” information; required by the government so they can collect taxes from you on money you have never seen, and has little (or nothing) to do with the “operation” of the business … or the ‘results’ of the business’ operation.

The answers are all there … somewhere, but …

What Is The Question?

As in mathematics, by knowing the question, you will be able to determine what specific information you require to cipher the answer.

Over the years, I have found that the only ‘numbers’ in business that mean anything are the “cashflow” numbers.  That’s because most of the business questions to which answers are needed relate to making the business more profitable … which is the ‘result’ of the generation and application of cashflow.

“Cashflow” is the only true indicator of the validity and life of the   business itself. — “Assets” represent the past.  “Liabilities” are the dark-side of the future.  Only “cashflow” represents the present state of the business … the here & now; today, instead of yesterday or tomorrow.

Although ‘cashflow’ figures are an integral part of business financial statements, they are inclusive; rather than exclusive, bulking all revenue from all sources and all expenses for all operations together.  Like a still photograph of the business some weeks … or even months … ago.

To answer your business questions you need to create a ‘motion picture’ of your business cashflow.  Beyond that, each ‘motion picture’ must be exclusively produced for each (and every) profit center … product or service … in your business; with only the cashflow and expenses for that specific product or service as players in your movie. — That’s why the best run businesses maintain internal cashflow and expense reports on a daily, weekly and monthly basis … with no information in those reports being more than a few days old; at most.

With that kind of current, exclusive information in your hands, you will be able to use the very simplest of mathematics to see where your business is today and employ the right procedures to reduce or increase your costs to increase your profits or multiply your cashflow.

As in mathematics … before you can make use of any information provided, you must FIRST know “what the question is.” — Once you know “what” you need to know, be sure you have the current, exclusive information you need to formulate your answer.  Always remember, it doesn’t matter how tall the teacher is.

Now…

Here’s a Mailorder Mathematics Formula That Always Works!

If a 1,000 piece mailing produces $X, then a 10,000 piece mailing will   produce $10X when all known factors are equal.  (The only times it doesn’t work is when all known factors are not equal; or all factors are not known.)

That means:  When you find a sales piece that generates a profit on small mailings, the odds are that the same sales piece, to the same kind of people, will produce the same ‘results’ … percentagewise … on ever larger and larger mailings.  So …

Find something that works.  Then, do more and More and MORE of it … increasing your ‘dollar’ profits in mathematical progression … until it quits working.  By then, you should have been able to find something else that works equally well; or even better.

The same holds true in Internet Marketing … only more so.