Accountants' New World

The serious flaws in the way results are analysed traditionally The traditional way that accountants analyse results is seriously flawed. Most accountants: • Receive the results, usually the monthly P&L, but it could be weekly sales or any other results. • Cast their eyes down the actual-budget variance column and look for the big variances. • Delve into the general ledger to try to find entries that account for the variances. • Ask business managers for explanations for the variances. • Write their analysis. The flaws in this process include that it: • Is reactive. You have to wait until the results are available before you can even start your analysis, and that can be several days or even a week or two after the period end. By then, business managers have detected and are fixing any problems themselves without any involvement from you, or the problems have got worse before being detected. Your value add is very limited. • Does not reveal problems that have not yet resulted in large variances, leaving you unaware of them and being unable to help nip problems in the bud or accelerate opportunities. • Is inefficient and not timely. The variances could have been caused by events two, three or four weeks ago and can be difficult for business managers to recall, resulting in delays as they dig out paperwork to remind themselves what happened. These are exacerbated as the manager then has to re-contact you so you can write your analysis, sometimes for them! It is unlikely that business managers will give this their highest priority as they have a business to run, so there can be long delays in you being able to write your analysis. • Compares actual results with a yardstick that is almost certainly invalid, the budget. Sadly, most businesses still prepare budgets despite many of them readily owning up to their budget being deeply flawed, such as being based on assumptions that are out-of-date and that it is a negotiated settlement for bonus purposes rather than being anything that anyone actually believes in. Your analysis has to try to make sense of the actual-budget variances even though they are partly due to the assumptions underpinning the budget no longer being or never having been valid. But you can't say that in your analysis and so you have to dream up plausible-sounding reasons for the variance and hope that no one notices that the explanation is at least partly contrived. The real comparison, as explained in Chapter 3, is how well your business performs relative to comparable other businesses. • Tends to make you write your analysis from a finance rather than from a business perspective because your starting reference is the financial variance. `This financial variance was caused by this event' (from a finance perspective and written in the passive voice), rather than, `This event caused this financial variance' (from a business perspective and written in the active voice). Business managers want your analysis from their perspective. For using active and passive voices see Appendix 1. All this gives you and accountants generally a poor reputation as you add little value and pester business managers about things that may be long gone and which they may have already fixed or are working on without any input from you. Don't beat yourself up if this is how you do it, almost every accountant does, but it is time to change. Too often I have the impression that accountants write the period results analysis so that in 100 years' time an historian can use it to write the history of the business. That is not what it is supposed to be for, although in practice that is often about the only use it can possibly have. You should know the results already By analysing unexpected events and business initiatives and monitoring sales and costs during the period, you should know the result pretty well before it is available and therefore provide business managers analysis of it promptly. You will already know what has caused the major variances because they at least partly result from unexpected events or the initiatives you are on top of and have already analysed. You should also have been monitoring the KPIs and key financial numbers during the period. Is that marketing campaign working and driving sales higher? Is that reorganisation reducing costs as expected? Is that initiative to eliminate invoicing errors actually reducing days debtors outstanding and improving cash flow as expected? And so on. During the period, you should be building up a picture of what the result will turn out like so that come period end you have no surprises and you can provide your analysis of it quickly.