When the story in the numbers doesn’t add up

Don’t you love a board meeting where the numbers are great? This time, on paper, the numbers looked perfect. Revenue was up. Costs were down. Margins were strong. The board congratulated themselves on another great year and started talking about dividends and the next holiday.

Six months later, the business was struggling to keep its largest customer, along with a ‘random’ drop in sales, and debt was rising…

Unfortunately, this isn’t unusual. It’s good to celebrate success, but there’s a risk to celebrating too soon and letting that take your eye off the ball. Numbers tell a story, but they don’t tell the whole story. Without context, numbers can cause you to fall into a false sense of security.

The illusion of a ‘good’ number

From our work at Gilligan Sheppard, particularly in valuations, disputes, governance and loss claims, I often review financial statements where the figures look healthy on the surface, but we find core issues after digging a little deeper.

I once reviewed a business with a sudden spike in profit margins. The board wrote it off as a positive, claiming ‘better efficiency.’ However, what we discovered was that the business had deferred maintenance on a key asset to cut costs. This resulted in the asset starting to wear, causing safety risks to rise (along with lowering staff and customer satisfaction), and we anticipated that it would cause delays across the business in capacity and production in just a few months.

In another business, we saw revenue growth that looked impressive, until we compared it to historical results and client revenue data, which showed that client retention was actually dropping. In addition, the growth that they were experiencing at the time was generated from short-term contracts that were far less profitable over time compared to their previous business model.

Even a ‘good’ number is nothing without its backstory; numbers in isolation can be misleading. That’s why you always need to get context. To get context, you have to ask why a number is what it is. For example:

• Is your revenue growth simply matching the wider market? If so, you might not actually be growing and gaining traction as an operation.
• Are there supply chain disruptions, currency movements, or regulation changes that are inflating or deflating your results?
• How about the internal dynamics? Staff turnover, disputes, bottlenecks, leadership changes…? These can all impact the sustainability of your numbers.

In valuations and litigation work, the story almost always changes once context is added. Sometimes the ‘bad’ numbers are actually a sign of resilience in a brutal market. Other times, ‘good’ numbers are masking as success, but the business is on borrowed time.

Context is the difference between a decision that drives growth and one that drives the business off a cliff.

The cost of getting it wrong

Making decisions on surface-level numbers alone can get expensive, quick.

A common mistake, particularly in small businesses, is cutting their marketing budget because sales are climbing faster than they can keep up with, and they have limited capacity. But it can take months to generate results from campaigns, so while it made sense to cut marketing in the short term, months later, their pipeline runs dry. (Our marketing team will love that I reference this, but it’s true!)

In disputes, a lack of context can lead to inflated or underestimated claims. We’ve seen claims fall apart because the numbers didn’t account for market conditions, competitor activity, or unrelated events that affected performance.

And this rule doesn’t just apply to business owners; it applies to professionals, like us, too. We have to constantly remind ourselves to understand the full context. I’ll admit, I once nearly walked away from a piece of work because, at first, the behaviour in question (based on a few numbers) went against my core beliefs. But after digging for the full story, the context completely shifted the narrative, and ironically, it turned out to be one of my favourite projects to date.

How to see the real picture

Sorry, but you know as good as I do that you can’t eliminate risk entirely. We are human, and the world and ‘business world’ for that matter, will always throw curveballs we aren’t prepared for. But we can build context into our decision-making to minimise this risk. 

To start with:

1. Treat figures as starting points or the ‘results’ from an action. What action created this ‘result’?
2. Look for patterns over time.
3. Benchmark your results against the industry, competitors, and the wider economy.
4. Mix where you get your data from. We want qualitative and quantitative information from multiple angles.
5. Get independent reviews for any major decisions. Find someone to give you an outside perspective and challenge your thinking, and be open to hearing what they think your blind spots are.

Numbers are powerful tools, but they’re not the truth in full. In a lot of cases, they’re a starting point. Without context, they can mislead, mask underlying problems, or hide opportunities.

The most effective decisions come from understanding both the figures and the factors behind them. When you understand the full picture, you can make informed decisions that create resilience and purposeful results.