Do you ever wonder how the big numbers the Federal Bank deal with are different than the money we use day to day? I think the only similarity is they both are measured in dollars but they are quite different items. "So what?" say you.
At Project X we deal with many items which are a measured in dollars but quite different. We take great care that we do not mix things measure quite different things.
I think the way we think about different things that are measured in dollars is important. For example sales, cost, profit and taxes are all measured in dollars are quite different items. If we treat each of these items as just parts of the same things we are distracting ourselves from managing each of these items in different ways.
Another dramatic example is income before and after tax income. They are very different. If we pay for something in after-tax dollars it costs more than if we pay for something in before-tax dollars. The comparison of the net cost is complex.
I have found this useful when I think about the huge numbers that government and the federal banks talk about. These numbers are really not the same dollars as we spend day to day. I expect these dollars exist only as lines of credit.
Another example was when I was talking to somebody about estate planning. He asked me about whether I was planning to leave a legacy. I said no and he said your planning would be quite different than somebody managing an estate. Money you leave as an legacy is different than the money you plan to spend in your lifetime.
Another example is the money you have invested in real estate. Usually this is a lifestyle investment as opposed to a investment to generate income or growth. It may grow but because you are living in the house converting it to money you can spend is not simple. It is a different kind on money.
In business, depreciation is quite a different type of money than cash. The confusion is that all these different things are measured using the same units of measurement.
Another practical example is you cannot manage profits, you can only manage revenue and costs. Profits even though they use the same measurement as the others it is the difference between two large numbers. Managing that number as opposed to the other two is doomed to failure.
I invite your comments.