Why "It depends" is Almost Always the First Response for Business and Personal Finance Questions
"It depends" is far and away the most common response I give when people ask me questions about personal finance where their business. When I was in school, we had a joke that "it depends" could be used as the answer to any of our teachers’ questions because every time we asked a question, those two words inevitably came up as a part of the response. In order to understand why "it depends" is the first answer to so many questions, you first need to understand the two reasons why more information may be necessary to properly answer a question. For the purposes of this discussion, we will divide these up into quantitative and qualitative reasons.
Quantitative Reasons for “It depends…”
If you are asking for advice with respect to areas such as technical accounting, personal finance, or business structures, your "it depends" response could be due to a lack of information with regards to an area that is subject to specific rules or regulations. Examples of this include:
Can I contribute to a Roth IRA?
Do I need to present a liability for accrued vacation on my balance sheet?
Do I need to itemize my deductions if I am married filing separately? and my spouse has itemized deductions?
Will I receive an economic stimulus check?
Each of the above examples involve circumstances where additional context is necessary in order to come to the correct conclusion under the established rules set out by the relevant regulatory agencies. let's look at some example responses to these questions:
Can I contribute to a Roth IRA? - It depends, do you make more than $124,000 a year? If so you're passed the income eligibility threshold and may not contribute to a Roth IRA.
Do I need to present a liability for accrued vacation on my balance sheet? - It depends, does your company have a defined vacation policy, or is the company using unlimited PTO? If using an unlimited PTO, then you do not need to accrue a liability for paid absences.
Do I need to itemize my deductions if I'm married the filing separately? - It depends, is your spouse itemizing deductions? If so you also need to itemize your deductions.
Will I receive an economic stimulus check? - It depends, if you are a working adult and made less than $75,000 on your 2018 or 2019 filed tax return, then you will receive a $1,200 check. If you made more than $75,000 but less the $99,000, you will receive a check for less than $1,200. And if you made more than $99,000, you will not receive a check at all.
Quantitative considerations are generally more relevant when asking technical questions that involve some sort of laws, regulations, or generally accepted industry practices. For accounting and personal finance in the United States, the most relevant regulatory agencies are the Financial Accounting Standards Board (FASB) and the Internal Revenue Service (IRS). For questions like these, the reason why "it depends" comes up as a response is because it is impossible to know the right answer without additional information because the rules will be different depending on the circumstances.
Qualitative reasons for “It depends…”
Qualitative reasons focus more on whether something should be done instead of whether something can be done. Generally, it's easy to spot by looking at the question. If the question is phrased in a way that uses the word should, then the response and any additional information required to resolve it depends are likely to be qualitative in nature. Look at these examples:
Should I contribute to a Roth IRA?
Should I contract with ADP to process my payroll?
Should I create an LLC for my business?
Just like in the other examples, the responses change depending on the context.
Should I contribute to a Roth IRA? It depends, do you have a sufficiently large emergency fund on hand to cover unexpected expenses? If not, put your extra cash into an emergency fund before you contribute to a Roth IRA, assuming you meet the income requirements to contribute to a Roth IRA in the first place.
Should I contract with ADP to process my payroll? - It depends. You could work with ADP to process your payroll, but their fees might be larger than a local CPA depending on the size of your business. Additionally, ADP also offers other services that work in tandem with their payroll processing such as human resources support. It may make sense for you to use them for both payroll and other services.
Should I create an LLC for my business? - It depends. Generally, it's a good idea to create an LLC for a small business, but there's likely to be a filing fee, and LLCs have restrictions on who can be a member. If you are planning to have large corporate investors down the road, it might make sense to become a corporation instead of an LLC.
As you can see, the qualitative considerations are just as important as the quantitative considerations. While there may not be a right answer because context changes, there's likely to be a right answer for you based off your circumstances, and the right answer for you is probably different from the right answer for someone else.
Lastly, I'd like to point out some circumstances where there may be an apparent answer, but that answer changes with additional information. Normally, I would never advise anyone to sell a product for less than it cost to make the product, because with each additional sale the company is losing more money. However, selling a product at a loss is better than not selling it at all and being stuck with unsalable inventory. Certain companies also intentionally sell certain products at a loss so they can get customers in the door to sell products with a higher margin (this is called a loss leader strategy).
So the next time you asked question and the answer you get is "it depends", take a minute to understand whether it was because of a quantitative consideration or a qualitative consideration.