This is part of a series of reflections inspired by my courses at HBX, an online business school cohort powered by Harvard Business School. With Business Analytics, Economics for Managers, and Financial Accounting, I'm learning the fundamentals of business. Find the whole series here.
We make thousands of decisions, big and small, every day. Do I want milk in my coffee? Do I take the highway or the back way? Should we move forward with this big proposal, or play it safe?
When we look at business decisions, it's essential to know exactly what we have, and what we owe. This is where accounting principles come in, whether or not you're the one doing the numbers.
All About Balance
Accounting boils down to a simple equation: Assets = Liabilities + Equity.
What this really means: what you have must equal what you owe and what you earn. To further illustrate:
- Assets refer to the materials that make up your business. You want more assets! It can be anything from your inventory and cash to office buildings and equipment. It's the stuff that helps you sell.
- Liabilities are what you owe. This doesn't just mean bank loans and supplier payments, but also what customers expect from you. When you purchase a gift card, for example, that's an obligation from the business to provide you with products down the line. As you purchase items with the gift card, their liability goes down accordingly (and their equity goes up, from the revenue they've earned from the sale).
- Equity is everything left over for the owners (including stockholders) of the business. This includes original funding and overall revenue.
In marketing, so much of what we do deals with brand power (or, in accounting, an "intangible asset,") and relationships, which makes following the accounting principles difficult. By its very nature we can't quantify it. It's challenging for marketers to speak to other parts of the business because:
- Our primary assets involve relationships and brand power, both intangibles. What we have to offer the business can't necessarily be quantified. Creativity doesn't lend itself to neat boxes.
- We owe our customers delightful experiences, whether it be an event, on the web, or with support. We owe our sales folks the information and content so they can convince our customers we're the best. For us, it's always about the customer.
- After that, what's left over? The revenue comes from sales--or does it? No matter who we are, we're all selling.
Is it important?
Once you can get the equation to balance, you have to know its relative weight to the overall equation. In accounting we call this materiality. It's the reason why you don't have to read every single transaction that ever occurred in Apple's earnings report. Basically, materiality allows accountants to categorize and group transactions based on what's important to the business. A $5,000 purchase might make or break a small business, but would be a drop in the bucket at a large tech company like Apple. What do your investors need to know? How will it influence their decisions?
It's the same in marketing. What does our audience need to know? How will it influence their buying decisions? We get caught up in the sometimes-fuzzy practice of generating demand that we forget to quantify what's most important both to the business and to our customer. What is our activity worth? Is it material? Do people care?
When we invest our time, energy, and budget into something, we need to know: is it important? Not to us, or accounting balance, or our personal agenda, but to our customer?
Each decision we make should weigh against what we have, what we owe, and what we want to deliver. That's the best way to make sure it's material to our business AND to our customer.