Illinois Investment Network


Recent Blogs


Pitching Help Desk


Testimonials

"For those of you that are asking yourself whether this site is real, the answer is yes. My first thought was that I would put my proposal on the site and it would be sent for review, and at this point someone from within the Dealflow Investment Network office would contact me as an investor so I would be more likely to pay the $249 fee. I received 8 responses from investors overnight and 2 more since then. Thanks Dealflow Investment Network."
David Kriedeman - Chris Christopherson Inc

 BLOG >> Recent

Fudge Factor [Decision Making
Posted on May 1, 2018 @ 07:12:00 PM by Paul Meagher

Wikipedia defines a fudge factor as an ad hoc quantity or element introduced into a calculation, formula or model in order to make it fit observations or expectations.

A common use of a fudge factor is in project management where you estimate how long a project might take and then multiply that time by some fudge factor to account for events or difficulties you can't anticipate. The size of the fudge factor might vary by task type or by how much estimating skill you have.

Another use of a fudge factor is in pricing your services. You might, for example, price your services differently depending on how busy you are. If you are busy already then you might multiply your going rate by some premium (e.g., x1.20 = 20% more) because you don't really need to add more work to your plate. If the customer bites at that price then it would be worth taking on the extra work but if they don't then you already have more than enough work at your going rate. Many different factors might influence your service pricing and the corresponding fudge factors you might want to use.

Fudge factors are also common in valuation where the value of a company is estimated to be some multiple of earnings (or some other quantity) common to companies in that industry. This reduces a very complex analysis to a simple rule of thumb that may or may not prove to be predictively accurate.

I recently did some year-end accounting for my farm and had to apply a fudge factor to my books to account for some uncertainty in my final numbers. A farm is like a small manufacturing plant that incurs lots of different types of expenses and receipts. The farm accounting fudge factor involved not claiming a certain amount of expenses that my bookkeeping told me I could claim. I left them unclaimed because I wanted to give myself a margin of error in case I was ever audited. The use of fudge factors in accounting is generally frowned upon and for good reason (see below), however, there is a cost to striving for extreme accuracy and there are judgement calls as to whether certain expense should be claimed. There is also procrastination and deadlines that force you to spend less time than you would like re-examining your receipts and numbers. To protect myself, and to terminate the accounting process faster, I used a fudge factor that involved not claiming a certain amount of expenses on the off chance that I might be audited. If audited, the government may end up owing me money. I can sleep soundly at night knowing that.

Fudge factors in accounting are often used to inflate earnings to make a company look more profitable than it is. Such practices are often called "creative accounting". Creativity in accounting is apparently a bad thing but you will often hear people say a good accountant will pay for themself - not because they are "creative" but are good at finding ways to decrease income and increase expenses. See The Ethics of Creative Accounting for more discussion of "creativity" as it applies to accounting.

Does the use of a fudge factor indicate that there is a problem with your approach to estimating, pricing, valuation, and accounting? It very well could be, but I also think that there is just alot of uncertainty out there that that involves diminishing returns to try to tame. You can keep on trying to estimate how long it will take to build a house but mother nature, suppliers, workers and financial institutions can all throw a wrench into your meticulously prepared estimates. People of action may be happy with throwing a fudge factor onto an estimate and getting on with the business at hand.

What causes these adjustments to be called fudge factors is that they seem ad hoc, not based in any solid theory but perhaps based on experience. The definition of a fudge factor does not indicate why we might be tempted to introduce an ad hoc quantity into our calculations. In this blog, I've provided a few reasons why we might be tempted which often comes down to a fudge factor being a strategy for dealing with uncertainty and time constraints. Because entrepreneurs and investors are often mired in uncertainty and have a limited amount of time to get things done, fudge factors may be the key to moving forward.

Permalink 

 Archive 
 

Archive


 November 2023 [1]
 June 2023 [1]
 May 2023 [1]
 April 2023 [1]
 March 2023 [6]
 February 2023 [1]
 November 2022 [2]
 October 2022 [2]
 August 2022 [2]
 May 2022 [2]
 April 2022 [4]
 March 2022 [1]
 February 2022 [1]
 January 2022 [2]
 December 2021 [1]
 November 2021 [2]
 October 2021 [1]
 July 2021 [1]
 June 2021 [1]
 May 2021 [3]
 April 2021 [3]
 March 2021 [4]
 February 2021 [1]
 January 2021 [1]
 December 2020 [2]
 November 2020 [1]
 August 2020 [1]
 June 2020 [4]
 May 2020 [1]
 April 2020 [2]
 March 2020 [2]
 February 2020 [1]
 January 2020 [2]
 December 2019 [1]
 November 2019 [2]
 October 2019 [2]
 September 2019 [1]
 July 2019 [1]
 June 2019 [2]
 May 2019 [3]
 April 2019 [5]
 March 2019 [4]
 February 2019 [3]
 January 2019 [3]
 December 2018 [4]
 November 2018 [2]
 September 2018 [2]
 August 2018 [1]
 July 2018 [1]
 June 2018 [1]
 May 2018 [5]
 April 2018 [4]
 March 2018 [2]
 February 2018 [4]
 January 2018 [4]
 December 2017 [2]
 November 2017 [6]
 October 2017 [6]
 September 2017 [6]
 August 2017 [2]
 July 2017 [2]
 June 2017 [5]
 May 2017 [7]
 April 2017 [6]
 March 2017 [8]
 February 2017 [7]
 January 2017 [9]
 December 2016 [7]
 November 2016 [7]
 October 2016 [5]
 September 2016 [5]
 August 2016 [4]
 July 2016 [6]
 June 2016 [5]
 May 2016 [10]
 April 2016 [12]
 March 2016 [10]
 February 2016 [11]
 January 2016 [12]
 December 2015 [6]
 November 2015 [8]
 October 2015 [12]
 September 2015 [10]
 August 2015 [14]
 July 2015 [9]
 June 2015 [9]
 May 2015 [10]
 April 2015 [9]
 March 2015 [8]
 February 2015 [8]
 January 2015 [5]
 December 2014 [11]
 November 2014 [10]
 October 2014 [10]
 September 2014 [8]
 August 2014 [7]
 July 2014 [5]
 June 2014 [7]
 May 2014 [6]
 April 2014 [3]
 March 2014 [8]
 February 2014 [6]
 January 2014 [5]
 December 2013 [5]
 November 2013 [3]
 October 2013 [4]
 September 2013 [11]
 August 2013 [4]
 July 2013 [8]
 June 2013 [10]
 May 2013 [14]
 April 2013 [12]
 March 2013 [11]
 February 2013 [19]
 January 2013 [20]
 December 2012 [5]
 November 2012 [1]
 October 2012 [3]
 September 2012 [1]
 August 2012 [1]
 July 2012 [1]
 June 2012 [2]


Categories


 Agriculture [77]
 Bayesian Inference [14]
 Books [18]
 Business Models [24]
 Causal Inference [2]
 Creativity [7]
 Decision Making [17]
 Decision Trees [8]
 Definitions [1]
 Design [38]
 Eco-Green [4]
 Economics [14]
 Education [10]
 Energy [0]
 Entrepreneurship [74]
 Events [7]
 Farming [21]
 Finance [30]
 Future [15]
 Growth [19]
 Investing [25]
 Lean Startup [10]
 Leisure [5]
 Lens Model [9]
 Making [1]
 Management [12]
 Motivation [3]
 Nature [22]
 Patents & Trademarks [1]
 Permaculture [36]
 Psychology [2]
 Real Estate [5]
 Robots [1]
 Selling [12]
 Site News [17]
 Startups [12]
 Statistics [3]
 Systems Thinking [3]
 Trends [11]
 Useful Links [3]
 Valuation [1]
 Venture Capital [5]
 Video [2]
 Writing [2]