Don’t Fiddle or Fudge the Numbers!

Prompted by the article: ‘Half of business leaders would fiddle numbers to meet targets’ published from the management Today website.

‘Despite a string of high-profile accounting scandals, many execs wouldn’t have qualms about adjusting financial performance.’ – Management Today.

As the old adage goes…

CEO asks “What are this month’s financials looking like?”

Accountant replies “What do you want them to look like?”

Now, tongue in cheek and all that, but the premise of this conversation is correct.

Don’t believe me? Then read on…

In Numbers we Trust

Financial performance numbers are fallible, as they rarely represent the actual financial factors necessary to run a business. This can be due to human interference, poor understanding, interpretation or simply ‘the numbers are no longer relevant’; as discussed in the ‘International Journal of Business and Social Science’ the Generally accepted accounting procedures (GAAP) allows opportunities for accounting malpractice to take place.

The journal points out that there are three common areas where financial statement fraud takes place; these are highlighted as ‘Improper Revenue Recognition’, ‘Manipulating Expenses’ or the ‘Overstating of Assets’.

Accounting malpractice aren’t small isolated incidents either! Company’s which have fallen over due to fraudulent accounting include: Enron and WorldCom in the USA and Northern Rock in the UK, but take a look at the snippet below, they are not alone.

Capture

Taken from the International Journal of Business and Social Science – Link below

Why do Good Numbers Matter?

Understanding financial performance numbers enable you to control the fast and slow twitch muscles of the organisation. Fast twitch muscles, more prominent in sprinters (fast bursts), allows you to react quickly to given opportunities or threats from the competition. Slow twitch musles, more prominent in marathon runners (endurance muscles), allow you to plan effectively; thinking about a massive sales push in peak 2016? How much do I have to play with – £1,000 or £100,000? The answer makes a massive difference.

Worst case scenario ‘you don’t know?’ leading to decisions which put the whole company in danger of over-trading, running out of cash; or under-trading leading to unhappy shareholders.

Perfect World Scenario

In business accounting it’s too easy to present a ‘perfect world’ scenario, when it just isn’t the case. Now this doesn’t always happen on purpose, sometimes the board are just too optimistic thinking that only positive things are going to happen, clearly operating with the best intentions, but not being realistic; or something comes at you out of the blue which was not visible to those in the inner circle.

It is fair to say that life isn’t straight forward, but you can add some realism to your calculations, but that isn’t in anyone’s interest is it?! Investors, shareholders, board, managers, banks etc. don’t want to hear about it, they only want good news…

Crystal Ball

How can you possibly know everything that is going on in the market place all of the time? In a global market place it just isn’t possible to know when that brand new sparkly gadget from china will land on the retailers’ shelves and start taking big slices out of the forecast turnover.

That said, this isn’t an excuse for getting things wrong either, it’s too easy to report bogus or incorrect information under the pretext that ‘things change‘.

Instead, we should look to move quicker, be leaner and more honest with what we know and how we interpret it.

Numbers can Ratify a Good Decision

Financial numbers in the form of historical data are good to know where you have been and whether the decisions you have made are correct; those in the future, in the form of a forecast, are just best guesses, based on your organisations aspirations, management dreams or even worse, a sales manager hoping the sale will come in.

Clear and structured decisions, based on strong financial information, no matter how bad they look are preferable to misconstrued figures that paint a false picture of the actual businesses performance.

Things Change

The reality of business is that customers’ requirements change and business’s need to change with them. Where this does not coincide succinctly variations in the organisations value alter, mainly due to fluctuations in trading, not necessarily reported on the bottom line.

Timely Numbers

If the financial numbers are misrepresented the senior management team are actively creating a smoke screen of the organisations performance and in effect, hindering its ability to change, even survive.

I believe that for financial numbers to make a difference you need them accurate, timely, relevant and within context of trade. Weekly awareness of the businesses performance allows you to deliver on your monthly targets. Why? Because you have time to react to week 1s numbers in week 2 giving you chance to alter your performance. When you leave it to a monthly review it’s too late to alter last months, you are actually looking to recover the quarter at this stage…not the month.

Good Leadership and the hard truth…

All this said ‘the fudging of the figures’ is obviously a very poor leadership practise, but what is the overall motivation? Is it to hit turnover and profit targets to achieve department bonuses? Keep your job, look good or satisfy the shareholders? Whatever it is it just isn’t worth it; stand up and be counted.

If you can’t deliver on the commercial objectives Mr CEO then seek help from the management team or external consultant (or something similar), that is what they are there for.

Only Kidding Yourself!

Quite simply, if you don’t know it is broken, and the organisation doesn’t know it’s broken either, then how are you going to fix it? Get the commercial numbers accurate, timely, and relevant and in context and you have a good base to work from. Anything else is just delaying the inevitable.

By the way, the journal also discusses ratios; well worth a read.

*All comments are based on my personal experiences and given freely. That said, you need to make your own choices. I can’t and won’t accept liability for you employing any recommendations. Business is all about risk. It’s your choice.

Nigel stone has, over the last fifteen years, started, led, consulted and nurtured both UK and European businesses to achieve quite outstanding results. Please feel free to drop me an email at ns@leadersp.co.uk

Link to the Management Today Article below:

http://www.managementtoday.co.uk/news/1391645/half-business-leaders-fiddle-numbers-meet-targets/

Link to the International Journal of Business and Social Science:

http://ijbssnet.com/journals/Vol_5_No_7_1_June_2014/29.pdf

 

 

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