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Percentage calculations

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In the toolbox of financial wisdom and savviness, there is a special place reserved for various percentage calculations.

These days we are ambushed by percentage figures at literally every street corner, so it is not surprising that it is important to know what they are all about!

Let us start with the basics first: The word 'percent' means 'out of a hundred,' so when someone cites 20%, in your head, you can make it 20 out of 100. In more mathematical terms, x% (the x stands for any random percentage figure) means a fraction of 100. To explain, a fraction is essentially the numerator divided by the denominator; in our case, 20 (numerator) divided by 100 (denominator).

So when we want to turn 25 of 250 into a percentage figure, we can use the following formula:

Percentage figure = (Value/Total value) × 100

25 /250 x 100 = 10%

 

Percentage growth and decline

Many, many times in business, you work with growth and decline figures. It is a must-have tool in your percentage toolbox, and again there is a formula to use here.

For a percentage increase, the following applies:

% increase = [(Mountain top – Base camp)/Base camp] x 100

I like working with this terminology because it is easy to envision and understand. Imagine you want to know how much % your sales grew in the past year! Let us say you made 30.000GBP in 2021 and managed to increase it to 41.000GPB in 2022; what is the percentage increase here? In this example, the 30.000GBP stand for your base camp, and subsequently, your sales managed to climb up to 41.000GBP, which is your mountain top.

% increase = [(41.000 – 30.000) / 30.000] x 100 = 36.67%

For a percentage decline:

Here the previous formula must be slightly adapted because now you go down from the mountaintop to reach base camp again!

% decline = [(Mountain top – Base camp)/Mountain top] x 100

Do you see that the only change is the denominator, which depending on where you start, needs to be either the base camp or the mountaintop? In the case of a decline, your starting point is the mountaintop; hence it goes into the denominator.

% decline = [(41.000 – 30.000) / 41.000] x 100 = 26.8%

 

Some food for thought!

Next time people ambush you with percentage figures, be critical of them!

My general rule is: that a percentage of something does not mean anything. So when someone tries to be smug with numbers and gives an example such as 20% of the general population drink alcohol regularly, you can immediately counter that this doesn't mean anything unless the "general population" is more clearly defined and given a concrete value!

I am still using a few tricks from my university assessment days to make thinking in percentage terms easier.

Trick Nr. 1: When someone mentions 60% of something, "of" means that you can multiply this number, such as 60% of students would translate into 60/100 x students.

Trick Nr. 2: Whenever I have meetings at my company, a colleague sometimes slips in something along the line: "if we make 20% less turnover, etc.…". I apply a simple way to get a quicker answer for myself: If you think about it, "20% less" means nothing else than 80% of something. So instead of taking 20% and subtracting it from the original figure, I take 80% of the value, and I am done.

A lesson in risk management

Percentage figures can be very deceiving! I'll give you an example! When you put 10% of your wages towards a bet that goes wrong, you might think, "never mind; it is only 10%; I will make it up"! But this is dangerous thinking! Imagine you earn 2000GBP a month and place a 10% bet on a racehorse called the "Jolly Bean counter" (what can go wrong with such a name). 10% of 2000GBP makes 200GBP which you entrust with this horse! But against all the optimistic predictions and odds, the horse loses, and you are suddenly left with only 1800GBP. You might think, no problem, I make a quick 10% somewhere else, and I am quids in, but I'm afraid that's not right. To get back to 2000GBP, you need not 10% but 11%. It means you need to make 11% on 1800GBP to get back to your original 2000%! This game quickly spirals out of control the higher the initial percentage loss is. Imagine you blew 40% on horseraces! To recover from a 40% loss, you must make 60% on the remaining number to break even! There is truth in the saying "cut your losses short" because it is a wise risk management measure, whether in business, investing, or private life! CUT YOUR LOSSES SHORT!

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