GIGO stands for Garbage In = Garbage Out. according to the GIGO principle when looking at a process:
- if the INPUT is not good quality (garbage), the OUTPUT will also not be good quality (garbage)
it means that the first thing you need to do when you do not get the results that you expect (OUTPUT) from a process (this can for example be the result from a calculation or something that is delivered by a machine) is to check what went into the process (INPUT)
in GIGO the process or the machine is treated as a black box. someone managing the box with GIGO does not look at what goes on inside the box, only at its INPUT and OUTPUT
GIGO is especially useful in accounting and for related financial calculations. this is because in accounting usually the process (what goes on inside the black box) is well defined, reliable and stable:
- the financial models and calculations have been developed and tested over time
- the input data are not changed in the process, just manipulated
- there are many checks and balances in the procedures
- accountants are well-trained and experienced professionals
- the tools are rock solid and designed for decades of heavy use
under the assumption that the accounting inside the black box works correctly (and that the box was well designed), the quality of the OUTPUT depends entirely on the quality of the INPUT
in this kind of situation a non-financial manager can use GIGO. it is the business manager that is responsible for the accounting numbers, not the accountant. and GIGO enables the business manager to take leadership
in normal circumstances the most common issue with accounting numbers is:
- completeness of the recorded transactions and correctness of cut off
this is like 'payroll expense is low this month, ... ah wait a minute ... location X is not included' or 'why are sales and margins so high, ... oops ... that new customer prepaid but we have not delivered yet'
this kind of quality control starts with the business manager who is responsible for the financial numbers. the manager understands the business and is able to check the key performance indicators, and so have an idea where the business is heading. the accounting and financial numbers are just another piece of information and should be within a ballpark from the manager's estimate. if this is not the case, then there is something wrong that needs to be investigated:
- the input may not be correct
- there is a business issue that needs explaining
- or something is wrong with the accounting
whatever it is, GIGO is the non-financial manager's best friend in finding out
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