Plans, projections, decisions, debates, results – all these and many more depend on the provision and calculation of outcomes (forecast or achieved) measured in monetary terms.

However, very few managers have paused to consider whether the numbers, even if scrupulously honest and perfectly presented, are guiding them and their business management in the right direction.

Consider this quote from the Harvard Business Review (January 2008):

‘For years we’ve been puzzling about why so many smart, hardworking managers in well-run companies find it impossible to innovate successfully. Our investigations have uncovered a number of culprits… These include paying too much attention to the company’s most profitable customers (thereby leaving less-demanding customers at risk) and creating new products that don’t help customers do the jobs they want to do’

Returning to this fray, the three authors, Clayton M. Christensen, Stephen P. Kaufman and Willy C. Shih, name the misguided application of three financial-analysis tools as accomplices in the conspiracy against successful innovation. They allege crimes against three suspects:

• First, the use of discounted cash flow (DCF) and net present value (NPV) to evaluate investment opportunities. This usage ‘causes managers to underestimate the real returns and benefits of proceeding with investments in innovation’.

• Second is the way that fixed and sunk costs are considered when evaluating future investments. The approach ‘confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack’.

• Finally: the ‘emphasis on earnings per share as the primary driver of share price and hence of shareholder value creation. Concentration on EPS ‘to the exclusion of almost everything else’ takes resources away from all investments ‘whose payoff lies beyond the immediate horizon’.

I summed up the last of the three crimes in my Essential Manager’s Manual, which has just come out in a new edition (Dorling Kindersley, £25). ‘Successful management’, it says, ‘involves trade-offs and compromises to reach the best decision when several factors are involved. The aim of tradeoffs is to keep short-and long-term risks as low as is possible.’

The mistake is to suppose that you can maximise investment and profits at the same time. On the contrary, the long view means that short-term profit has to be sacrificed for long-term success. The other way round, ambitious plans for expansion may sometimes have to be trimmed to achieve satisfactory current returns. Products are similarly affected: you cannot simultaneously maximise a car’s acceleration and minimise its fuel usage.

Try to square this circle, and you end up with a business which is biased against successful innovation. In this tumultuous decade of the unfolding 21st century, that’s no place to be.

For more on business management, see http://www.thinkingmanagers.com/business-management