They Keep Changing Their Minds

The woman beside me and I were looking at the travel expense in the General Ledger and in the report before me. They didn't match. My report was in a different format than the GL. I made the comment that if we reorganized the cost centers in the GL to match the reporting format, she wouldn't have to do so much reconciliation.

"That's true," she said, "But they keep changing their minds about what they want."

Then she corrected herself. "Actually, they have been pretty consistent since they started that three year plan."

Ahah! She hit on the secret of financial reporting: the planning process needs to drive reporting. Here are some hallmarks of a good financial planning report.

1. It highlights the organization's drivers.
2. It makes responsibilities clear.
3. It spans more than one year.
4. It is intuitive to non-financial readers.
5. It is brief.

Drivers

What critical forces contribute the most to your business? (Hint: if your list has more than 10 items on it, try again.) For example, commodities prices and the foreign exchange market might have a significant impact on the cost of your raw materials, which in turn affects how much profit you make on every sale. Maybe your research department has contributed new products that have led you into new markets and higher sales. Maybe your business is highly sensitive to inflation or interest rates.

Whatever you identify as your business drivers, make sure their effect is front and center in the financial statements. Don't bury them in some page 10 inventory schedule.

Responsibilities

You should have one schedule that breaks down your goals by the people/department responsible for carrying them out. Often this is done by having a separate column for each one. Every number in the report is someone's responsibility, so there can be no finger pointing.

Multi-Year

Even if you feel that you can't see more than six months into the future, creating a multi-year plan helps you see the relationships between the different elements of your business. If this is unfamiliar territory for your staff, make them do it anyway. The trick is not to ignore the results when real life experience makes mincemeat out of your forecasts. Have a Lessons Learned session with the managers and go through the reasons the forecast went south. Everyone will learn and their forecasting abilities will get better. Trust me on this one.

Intuitive

Good leaders can see through the fog of business and maintain a clear vision of their goals. Good financial executives can grab that vision and express it in financial statements. Some tricks of the trade:

• Divide your income statement into sections, with subtotals for each driver,
• Don't cram too many columns of numbers onto one report (no more than 4),
• Put the most important expenses first, and
  
• Anticipate the questions and make sure your format answers them.
  

Brief
"Nice analysis," the Chair remarked to me. "Now get it down to 3 pages." When he saw the look on my face he added, "If you write three pages with lots of bullets, they'll read the whole report. If you write more than that they won't read it at all." He was right.

In a recent meeting I was asked for a "one pager" on an accounting issue. It was too complex for a one page analysis, but the Chair knew what he was doing. The committee discussed the issue and asked me to provide a five page analysis. Because they asked for it, they will be much more engaged in the issue than if I had presented the longer analysis first.

Less Numbers, More Story

Harry is one of our unit managers. His normally calm, diplomatic voice takes on a sudden energy as he leans across the table and says, "People seem to think that any mission will do. That's just not true."

Harry has a point. Missions have to resonate with the team or they will not motivate them. I have worked for a passionate leader and I really felt the difference. When he announced his vision for the company, he made sure we all knew where we could make a difference. We worked together and supported each other. There was a well defined goal that was just beyond our reach.

Those are all good things, but, as I look back on that experience now, I see it differently. It was not the goal that motivated us, but the story of The Little Company That Could. We saw ourselves as a small Canadian company competing for recognition with our much larger colleagues south of the border. It was the classic David and Goliath story, and we were determined to create a happy ending.

My current company's story is very much in my mind as I put together the book that will become the blueprint for our company's 2009 year. People don't traditionally look to budgets for inspiration, but I am out to change all that. Here's what I'm planning:

• Less Numbers, More Story - The budget will now include a narrative telling the reader what we are aiming to achieve. The detailed tables broken down by Cost Centre, Account and month that I need to import the budget into the accounting system will be sent to the Appendix. People don't read them anyway.
  
• Align with the Organization's Priorities - The accounting system breaks the organization down into units, but the Board sees the operations in terms of their priorities. The budget book will take all of the individual managers' goals and show how they fit into the Board's priorities.
• Support the Priorities with Graphics - I will use my Microsoft reporting tools to present the plans graphically, just like I promised. The reader will see that we are putting our money where our mouth is.
• Get More People Involved - Some people view budgeting as a black box: a mysterious process with results that are beyond their control. The budget book will have a section describing the process and talking about how budget adjustments were made. We will ask for more input from the people most affected by the budget and actively seek their buy-in.
  
• Use the Technology - Use the Financial Reporting Software rather than Excel for the Budget reports so that changes to the Budget ripple through all the reports, instead of relying on more fragile spreadsheet links. Use Navision (Microsoft Dynamics NAV) to track the original budget separately from subsequent transfers and updates, so that I can show both on financial reports.

There was an excellent demonstration of the power of a story in Drew McLellan's Marketing Minute today. It certainly inspired me.

The public may not be on the edge of their seats when this book is released, but I'm hoping that Harry will be.

Turnarounds: 2. Technology Triage

The first article in this series talked about the initial things to do in an accounting turnaround. This one is about the accounting system itself. The first step is triage: determining if the system is good to go, walking wounded or a dead man standing.

The brutal reality is that in a turnaround situation there may not be a budget available to upgrade the technology. In addition, the existing technology may be old. Here are a few ideas about how to make the best of what you have:

1. A better chart of accounts - If the staff is spending time analyzing accounts to separate different kinds of transactions, then create new accounts and define what kinds of transaction go in each.
2. One-size-fits-all financial statements - Talk to the managers about what they need. The sales manager needs different detail than the production manager, for example.
3. Inflexible Reporting - Older systems did not come with flexible report writers that let you create custom reports, but you can often retrofit a report writer to an older system, even if all it does is copy the contents of a file into a spreadsheet.
4. Version 1.0 - Check with the software developer whether you are on the current version. You might even be eligible for a free upgrade. If there is a user group, talk to them about what to do to bring the system up to date.

Giving management and other stakeholders (e.g. the bank) better, faster financial reporting goes a long way towards re-establishing trust in the accounting system. Your time spent on technology triage will be well spent.

Next installment: Finding a New System

Competitive Edge: Your Accounting System

The Toronto Globe and Mail ran a story about Analytics, saying that a company's statistics can be a powerful tool in the right hands. Harvey Schachter, the Globe's "Monday Manager" quoted from Competing On Analytics, a Harvard Business School book by Davenport and Harris, which highlights the need to have the right data and the right management support in order to reap the rewards of good analysis.

How well I know that story. Every time I implement Microsoft Dynamics (Great Plains or Navision), I offer the client the ability to integrate operational data in the accounting system, but I am rarely taken up on the offer. One glowing exception was a felt manufacturer where the President had a one page report of key performance indicators that he used to run his business. It was quite a challenge to make the new system fit the summary cash, balance sheet, income statement and statistics (with a separate column for each subsidiary) onto one page, but it was worth it!

Try this: picture your company as a sports franchise competing in the major leagues. What statistics would help you manage the team? Think in terms of:

• Output: How much do you really earn per unit, after all discounts?
  
• Input: How much waste is there, and at what stage does it occur?
  
• Human Resources: How many hours go into your product or service? How high or low is your utilization?
• Equipment: How long do your machines sit idle?

Often managers feel they know the answers to this type of question already. As the Production Manager of a tool and die shop said to me, "You're not going to replace me with a computer!" when I implemented a job tracking program for the General Manager. But that same manager was really surprised at how busy his plant turned out to be. He had been considering whether to replace his older drill presses with computer aided equipment, but he ended up keeping both the old and the new equipment when he saw the report of his order backlog.

Even if you have an older accounting system, you would be amazed at the quality of report that can be obtained from standard microcomputer software such as Crystal Reports or even Excel, when they have detailed financial and operational data to work with.

Nortel Re-Energized?

In the July 30, 2007 Toronto Globe and Mail Report on Business, Mike Zafirovski, the CEO of Nortel Networks Corp, was asked, "What was the old Nortel's big mistake?" He responded:

Nortel used to have some of the best processes in the world . . . . A lot of Nortel's old processes were thrown away. . . . Many acquisitions were made and the systems were not integrated. Lots of accounting issues came out of manual processes on top of manual processes.

It's true: having an excellent accounting system will not create a successful company, but a bad system can sure turn an excellent company into a failure! Nortel is an extreme example, but ask yourself if you could make better decisions if you received better financial and operational reports faster. That's what re-energizing a system is all about.

Read the whole article here.

Energizing your GL

Signs your GL needs re-energizing:

1. You have accounts with the letter A after them, e.g. 1200A (There was no room at the inn!),
2. In order to prepare certain reports, someone has to analyze transactions in an account line by line (as if they don't have better things to do),
3. When creating financial statements you have to pick an account here and an acount there (cherry picking without the pie at the end), and
   
4. Transactions are posted to "Other" because there is no specific place for them to go.

Do you feel stuck with a system that can't be changed? Consider a re-implementation of your existing software. We download all the transactions you need, reformat them given your current needs and upload them into a new company. Then:

1. Not only will we get rid of the "A" accounts, but we'll also have space for new ones,
2. The chart of accounts will be detailed enough to handle all your reports,
3. The accounts will be in logical places, making it easy to create new reports, and
4. Every transaction will have a home.

How does that sound?

Good News or Bad News

Have you ever read an accounting analysis that sounded something like this:

The negative variance this month is due in part to budgetary timing differences offset by expense accruals . . .

Is that news good or bad? Who knows? What's clear is that accounting jargon is distorting the message. Now, most analysis doesn't get quite this bad, but jargon is a big issue in financial statement analysis. Here's a little primer:

Variance - the difference between two numbers, e.g. this year and last year or this year and budget. A positive variance is good. A negative variance is bad.

Timing Difference - typically means that an expense was expected but it occurred in a different month (either earlier or later) than originally forecast. This is neither good nor bad news. It just explains why the number is different.

Accruals - see below for a more detailed description. Accruals mean you recognize your income when you earn it, not when the money comes in and you record your expense when you owe the money or have used the good/service, not when the money is actually paid.

For me the biggest issue with financial analysis is not the jargon, however, it's the tendency to say what happened, but not why. Decision makers need to know things are going right (or wrong) in order to make good decisions. Knowing that an expense went over budget is only half the battle. You need to know why as well.

Accruals

I first was promoted to Controller during a shakeout at an insurance brokerage which went right to the top. After a couple of months, the new president called me into his office to explain why "my" sales number was different than his. He was trying to understand the financial statements and he had copied all of the invoices issued to customers in the month. I explained that some of our policies went for more than one year and we had to wait until we earned the commission in the future years before we could include the money in our sales numbers. It made sense to him. It also helped de-mystify the whole accounting process for him.

But I think the final word has to go to the Vice-President who cured me of my accounting financial analysis jargon. He said to me, "Bill, from now on I want to see the words, 'Good News', or 'Bad News' at the top of your analysis reports."

That's what it all comes down to, isn't it?

Re-Energizing an Old System - Reporting

Businesses transform, sometimes daily. Accounting systems evolve.

How do you know whether your accounting system has fallen behind the business?

Reporting

1. Ask people if they use their reports.

   A client of mine acquired a small business in northern Ontario. They asked me to go in and review the accounting system. I worked with the local Controller and asked him if I could interview the General Manager, so we made an appointment. I asked her what she thought of the financial statements and her reply was classic, "Oh, I don't use them. Too many numbers." It was true. The accounting report was on legal landscape paper with a column for everything you could think of. All the information was there, but you had to analyze carefully to find it. The Controller was crushed. He had worked so hard to get everything into one report. Later he said to me, "If she had only told me, I would have given her what she wanted."
   

2. Don't wait for them to ask for new ones.

   They often assume that what they are getting are the only reports available.
   

3. Don't just accept what they say.

   Sometimes even when you ask they are not forthcoming or can even be hostile. I asked a production manager what would help him schedule jobs for the tool and die shop. His first answer was, "There's no way you're replacing me with a computer." That night I used a spreadsheet to make a mock version of the kind of report I had in mind. When I showed it to him the next day, he tore it apart. Why did I use the shop number? Customers always call using their P.O. number, etc. etc. But we had moved from discussing whether he needed a report to just what report would help. Eventually we found what he needed, and no, he was never replaced by a computer!
   

Reporting is the key because it supports good decision making. It's not just the reports, but also how they are formatted and how quickly they are produced.