Introduction to Improving Profits

A company's accounting records and financial statements are based on accounting principles, concepts, detailed rules, etc.

For example, because of the cost principal and the monetary unit assumption a company's accounting records consist only of items that were acquired in a past transaction. Those guidelines also mean the recorded items are usually reported at an amount that is no higher than their cost at the time of the transaction. While this may be convenient for auditors, who can verify past transactions instead of determining current values, it is not helpful for people who must make decisions.

Decisions—including those to improve profits—involve the present and the future. (No decision can undo the past.) Accordingly, the decision maker needs current and future amounts. Always keep in mind that the numbers in a company's  general ledger are all past, historical, or sunk amounts. Some of these historical amounts may be completely irrelevant, while others may be useful if they are adjusted to the present and future.

Fortunately, only a limited quantity of numbers may be necessary in order to make the correct decision. For example, if the executive team's compensation will not change if the product line is expanded, then the executive team's compensation is not relevant and does not have to be brought into the analysis on the expansion.