Do your numbers make sense?
When I look at our financials the business seems to be doing better than I expect. Should I be pleased or worried?Recently a friend of mine, Max, received a good news/bad news call from his accountant.
"The good news is that your tax bill for FY10 is much lower than we expected," said the accountant.
"So what's the bad news?" asked Max
"The bad news is that your profit is much lower than we thought too."
The accountant went on to explain that because of the lack of profit my friend wouldn't be able to take his planned dividend out of the business.
Max was a bit irritated by that because he had made plans to spend it, but he's a take-it-on-the-chin type of guy so he accepted it and moved on.
A few days later Max realised that the error in the FY10 figures had bigger implications than a shortfall in his personal cashflow.
Max had based his business decisions on the understanding that FY10 had been a great year.
To capitalise on the success he had increased the size of his workforce in FY11 by about 20%, had relocated to larger premises and had undertaken an expensive overhaul of his website.
Now Max was wondering whether he had invested too heavily in new infrastructure.
Max went back to his accountant to find out exactly why the results for FY10 were so different to what he expected.
The short story – and I won't go into the gory details here – was that there had been a billing issue and a number of clients had been over-invoiced.
Although the over-invoicing had been sorted out and a thorough check into FY11 (and projections for FY12) showed the business could carry the new hires and the larger premises, Max felt sick.
It turned out that Max had initially been surprised when he looked at the FY10 financial accounts.
The business had done much better than he thought. He even mentioned that to his accountant but he didn't press the matter because Max put more faith in the numbers than in his gut-feeling assessment of the business.
Now Max wished he had challenged the numbers his accountant gave him and he felt foolish for assuming that the accountant's figures were more accurate than his business sense.
I met with Max last week and these are the lessons he was keen to (anonymously, we all have our pride) share:
- Getting the numbers right is vital because they heavily influence your decision-making.
- Accurate monthly management accounts are a must for business.
- Investing in a good accountant is money well spent.
- End of year accounts need to be finalised promptly after the year-end – not a whole year later!
- The CEO should do "back-of-the-envelope" checks on the numbers and ask the question, "Do these numbers make sense to me in the light of what I know about the business?"
- Accountants make mistakes, so put in checking mechanisms.
- Trust your gut instinct.
You might think Max was particularly unlucky or hopeless – quite possible.
But he is not alone. Just this morning I heard a similar tale where the final financial wrap up of FY10 showed a year not nearly as successful as had been thought.
Do your numbers make sense?
Julia Bickerstaff's expertise is in helping businesses grow profitably. She runs two businesses:Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of "How to Bake a Business" and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).