Qualitative Financial Metrics (writing assumptions)
This week’s video talks about Qualitative metrics (as opposed to Quantitative metrics). You need both! Watch to see the details…
VIDEO SUMMARY
This video is on qualitative financial metrics. I have been talking lately about performance metrics, and I have been talking mostly about quantitative metrics. We just talked about Jensen’s alpha. Now there are a lot of quantitative metrics out there. And it is really easy, especially for Finance people, to get caught up in the data. You get so caught up in sifting through the numbers that you lose sight of the big picture. So in addition to quantitative metrics, I encourage people to also track qualitative metrics in a consistent and structured way.
So what do I mean by qualitative metrics? I mean writing down your assumptions. It is really that simple. So your quantitative data should support your qualitative interpretations. You are trying to qualitatively describe what the data means. So what you want to do is track your assumptions in a consistent way. Then what you can do over time is look back at your assumptions and see how good they were and if there are ways to improve.
I think it’s helpful to take a step back and really think what is going on here. What you are doing in Finance, is you are predicting the future. Every financial decision follows the same process:
- Evaluate the future
- Identify assumptions
- Make a decision
- Wait for the outcome
So your goal as a finance person, is to get better and better at this process.
The great thing is the human mind is already wired to predict the future. You are actually really good at it. Let’s look at a non-finance example. Let’s say you are walking along outside and you come across a small puddle. You know from your experience that you can jump over this puddle and be safe. You are predicting the future outcome, and then you make the decision to jump, and you make it across safely. This is the same process you follow if you come across a huge puddle and you make the decision to walk around instead of jump over. We are constantly evaluating the future and making decisions. This is the exact same process as financial decisions. You look at the stock market, the economy, the competition, and make a decision on whether it makes sense to jump in to an investment.
So let’s look at the decision process again. What you see here is that your assumptions are key. You are making your decision based on your assumptions. So the better you can become at making assumptions, the better your outcomes will be. So in the context of the whole performance metrics process. You have a set of quantitative measures you track. Then you also track your qualitative measures. And together they give you a picture of how good you are at making financial decisions. And the goal here is feedback. Because you should be able to take this data and learn from it over time, to just get better and better.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.