We, by nature, look for order rather than chaos. We can find this proven in the earliest writings regarding human behavior. Order brings consistency and stability to everything that we are in life. When we look at what order means we see two things, a process and a focus. Process means a step by step pathway that is taken to get to a specific point. It does not mean that there is only one pathway, there are often many different ones. For example, you are in Los Angles and want to go to New York City. You could drive, take a train, a plane, hitchhike, car pool, or many others. The point is that how we get there is not typically the issue, it is the process. We often see this issue occur in our daily lives due to one cause, not asking why. Very often we do a certain task, we do it the same way every time. Over time we forget why it is we do it in the manner that we do. It has a process and an order, that way it can be repeated, often without thought. Then we try to automate it, and no one ever checks to make sure the results are correct. This is what happens on a mathematical process that we use so very often.
Those of us in business understand a very specific concept, calculating interest. We see this in every financial and business math book printed. The equation is represented by:
I = P R T
We see the variables as I as interest, P as principal, R as rate, and T as in time. Many times, the books explain each one of these variables, which I am sure we all understand. The problem is the variable of T. Time and Rate are ALWAYS calculated in years. This means that if the time period is not an even year, this must be converted into a decimal for this equation. This must be done before anything else to solve this equation. So, the equation should be noted like:
I = P R (T)
This is where we see many issues when solving this equation. Remember mathematical order of operations. Many of us learned it as “Please Excuse My Dear Aunt Sally”; Parenthesis, Exponents, Multiply, Divide, Add, and Subtract. Often when solving this equation, without the parenthesis, it is completed like this:
I = \frac{P*R*Months}{12}
This does not result in the correct answer. Time is a SINGLE variable, not part of all variables in the equation. Therefore, process is so very important in anything that we do. It keeps us on track, and straight. Why do we see this example so often? Because we forget how important process and order truly is in life. Without a process we cannot prove that what we do is accurate, repeatable, so all we have is chaos.
Now that we have looked at the practical of this example. Let us take the following and solve this using both the process described.
P = $10,000
R = 7%
T = 10 months
The correct answer will be:
Now let us see how this is solved when the parenthesis are not in place:
We have just proven how order of process is so very important.
Now let us look at the second part to this discussion, focus. In order to be consistency, we need to be looking at the same point, focus. Often this comes down to communication, letting others where we have our anchor point. The perfect example of this is another business concept, markup.
Markup is defined as the difference between what you pay for an item, and the selling price. Although this sound like a very simple concept, it could prove not to be. Often markup calculations can be different, depending on the focus of the desired outcome. The most common way to calculate markup is to be focused on the cost of the item. The other way is to be focused on the selling price. Let us look and see why these two philosophies are different and see what kind of affect they have on profit.
When focused on the selling price, the equation will look like this:
S = Selling Price
C = Cost
M%=Markup in percentage
An example of this would be:
S = ?
C = $384.00
M% = 35%
The profit in this example will be $134.40. Let us also be accurate and state there is no way to verify this answer, although a very simple calculation, errors can always occur. Now let us change the focus to be on the selling price, rather than the cost. In this case the equation that is used is:
When dealing with mathematics, the one thing that should never be forgotten is order of operation. Parentheses are ALWAYS solved first. Let us look at how this formula is applied with the same example used above.
S = ?
C = $384.00
M% = 35%
In this case, the profit is $206.77, ($590.77 – $384.00). When using this philosophy, we can verify the answer, by using another concept, discount pricing. Discount pricing allows us to take the selling price, and discount it to a specific percentage, to solve the answer. Using the same variables as above, we can solve as follows:
This demonstrates that using this method we have a provable way to verify both answers as being accurate. Also, when we use the method that focuses on the cost, we do not have this ability. Another good thing about being focused on the selling price, is that we gained $72.37 more in profit as well.
Just as anything in life, there is not right or wrong answer, just perspectives. The choice of these two is yours, or those that make the decisions within the organization. What we need to understand, and communicate to others, is the clarity of the focus.
Focus and process are what help to bring order. What we need to do, is to be sure that we communicate these two aspects to all those involved with any decision.