When I began this role in earnest I supposed that, of my three pillars, the tasks of ‘flogging it’ (sales and marketing) would be the dominant activity. Designing and making the future is where I felt my value lay above all else. But all plans start with a quantified appreciation of ‘today’, from which a course will be plotted to reach a target: the business plan. That quantified starting point has proved to be far more intriguing than I would have ever imagined.
When people say “yeah, we use Sage” it is tempting to tick the bean counting box as sorted. But what I have quickly learned is that the seemingly innocuous statement demands cross-examination because, to begin with, the quantified starting point has often not been readily available.
The operations manager of a company asked for my help with calculating the affordability of a substantial piece of machinery and was also curious whether or not his business could afford a web site idea that we had talked about. “We use Sage.” I asked to see the Profit & Loss (P&L), Balance Sheet, Aged Debtors & Creditors reports and the Trial Balance. He had never seen these reports before and, at least to begin with, saw nothing wrong with that. “The accountant does the accounts at the end of the year.” When he relayed my questions to his colleagues, they initially fobbed him off …then asked him “what format would you like them in?” (Like there is much choice…) They finally sent fifty Sage-generated nominal account reports. What on earth was that about?
I took the data from the reports and constructed 12 months’ P&L reports for us to review. The company – or rather his division of it – could certainly afford the machine, probably more than one of them, and still afford just about anything it fancied from a web site candy store. The operations manager was stunned because the profits calculated were nowhere to be seen. To find the answer needed a balance sheet.
There wasn’t one. How could this be possible? They used Sage, right? Well… The managing director used the bank statement to work out the company’s VAT return. The bookkeeper then used the bank statement as the source for entering things in Sage. Sage had never actually been configured properly so the Trial Balance totals were the sums of everything since the day Sage was first used, which was almost two years’ worth of data input. When asked why he did not use Sage to calculate his VAT return, the MD replied that he did not trust it.
I could not for the life of me see how the accountant could have constructed accurate accounts from this muddle save for using the P&L account as the adjustor of everything missing. Short of calling every customer and supplier to ask for statements in the hope that their records were better kept, there was no way of knowing what was owed either way. Nothing was reconciled. The MD was proud of the bank balance and it was initially comforting to know there was about £100,000 in the bank. Until he dropped the bombshell that the company owed one supplier almost £250,000 – for which there were no invoices recorded in Sage because they had not, of course, ever made an appearance on the bank statement. Despite one division making handsome profits, the other division lost money at a prodigious rate. The company was, overall, insolvent and sinking.
This triggered quite an adventure – one that found us visiting the High Court in London a couple of months later. The case contains some pretty extreme incompetence not to mention a toxic dose of dishonesty. The profitable division was extracted from the whole to form a new company and is, I am pleased to report, soaring with the former operations manager as its Managing Director and primary shareholder. The remainder of the original company somehow staggers on with quite terrifying Swords of Damocles hanging above it: the creditor owed a quarter of a million pounds and HMRC among them.
Other examples are less extreme and far more common. Whatever accounts system is in play, results should be monitored at least monthly – but even this frequency only looks at bolted horses. I strongly advocate real-time monitoring and I create the tools to do exactly this for every client. To continue the equine analogy, real-time reporting enables sight of horses getting restless… the stable door bolt rattling free… and provides opportunity to attend to the metaphorical beast and its enclosure before loss or damage comes to pass.
I see companies who do not run month end routines and who do not look at reports monthly anyway; their success barometers are ‘feeling busy’ (or not) and how much money is in the bank. Such barometers are not unreasonable in themselves but provide little scope to make timely improvements and ultimately form a barrier to decision-making. I am not talking about micro-businesses either, these companies are turning over millions. Reading accounts does not seem important because they are not fully understood. I am told things like “the accountant said turnover was a bit more than the year before but profit was lower” and it is a mystery how or why this occurred. Better luck next year, eh?
Non-scientific, opportunistic pricing policies are common, as is a lack of interest let alone measurement of ‘budget vs actual’. Rather than calculating a price for work, the boss has a decent idea of what the market – or a specific customer – will stand. This may be drawn from looking at peers’ prices and matching/beating them, or arguing a premium for being somehow better than competitors. This is tacitly relying, by proxy, on others’ costings to price work. With no record of the implied budgets created by these pricing decisions, nor a determination of profit at the individual transaction level, it is impossible to attribute actual costs to work done and check whether a profit expectation was met. The accountant brings news at end of year – and it really IS news. All the while, “we use Sage”… (or QuickBooks, or something else, I’ve no axe to grind about the chosen tool).
Helping my clients understand accounts has emerged as a very satisfying and unexpected aspect of my work. I have always enjoyed the elegance of mathematics, the perfection of double-entry accounting principles and the satisfaction of reconciling to the penny. Once we have quantified our starting point and defined specific success coefficients (alongside the success barometer) my clients find real fascination in their bean counting en route to this year’s targets. It is analogous to becoming a motor racing team boss and avidly looking at performance data to go faster, using information to constantly make winning adjustments.
No longer are the accounts some vaguely unfathomable annual obligation, they are a continuous focus and it should be no surprise that the business plans work. Actually, it is better than that: as I write, everyone is ahead of plan. How are you doing?
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