You don’t need to be an accountant to work with the numbers reported on your financial statements. Rounding numbers that are four or less down and numbers five to nine up make seeing whether a number is trending up or down easier to access.
When it comes to making more money, it comes down to raising sales and lowering expenses to increase profits. You don’t need decimal point accuracy to do this. You need a disciplined assessment of the quality of your profits as they are reported to determine what needs to change, what should continue, and what needs to be stopped.
Overview
Rounding involves replacing an exact number with a shorter, more straightforward, and easier-to-recognize value. For example, $24,850 should be rounded to $25,000.
While a round number is not precise, it is easier to use. The general rule for rounding is to round the number up if a number is followed by 5, 6, 7, 8, or 9. Example: 488 rounded to the nearest ten is 500. If the number you are rounding is 0, 1, 2, 3, or 4, round the number down. Example: 3,333 rounded to the nearest ten is 3,300.
An approximation is anything similar, but not exactly equal, to something else. A number is approximated by rounding to the nearest tenth, hundredth, or thousand. Profit planning is made easier when you set approximate vs. exact targets. Example: $250,000 in planned Net Income is the same thing as $258,467. What’s important is you are targeting $250K in bottom-line profits. That’s the goal.
Rounding and approximation are preferred when working with numbers tied to your financial statements. It makes it easier to see how a number trends and keeps you from getting lost in the decimals. Example: planned Gross Profit is 35%, while the actual came in at 35.7%. The actual Gross Profit rounds to 36%. What matters is you are 1% better than the plan, on Sales of $1,000,000 that’s $10,000 more level one profit.
Decimal points matter when you need a precise number. For the vast majority of small businesses, decimals make numbers more complex and harder to work. Example: $1252.67 and $1203.41 is harder to read and assess against actual-to-plan or year-over-year variances than 1,253 is higher than 1,203.
If you are struggling with the numbers on your financial statements, you first want to eliminate the decimal points and make sure you are using a “,” to separate 1000 to read as 1,000. You also don’t need the “$” sign because you know the numbers reported are in dollars.
Another trick to getting better at working with your business numbers is to round numbers to an easier-to-appreciate number so you can see how the number is trending. Knowing if it’s up or down is more important than knowing that the exact number is $24,850.36 when it is easier to work with as 25,000.
The goal with numbers tied to confirming the quality of your profits from BusinessCPR™ Step 3 is to see the patterns and trends represented in the changing numbers. Are the new numbers going up or down against the target numbers? A cost trending up is bad. A profit trending up is good. By making numbers easier to read coupled with pattern recognition and trend tracking, you don’t have to be an accountant to see if a number is out of range or if the trend is positive or negative.