Benefits of Getting Wrong Numbers: Follow Up
I received many calls about my May 27, 2014 blog questioning my recommendation that quick “wrong” numbers are better than tardy accurate numbers, so feel I need to explain this a little more.
That blog, and this one, refers to interim numbers provided to management that will be used by them to control the business or not-for-profit organization and their activities, not year-end amounts that will be reported on a tax return or financial statement being provided to anyone other than immediate management.
QUESTION: What is the purpose of interim numbers?
REPLY: To assist management and perhaps owners and board members.
QUESTION: What is the importance of quick numbers that are inaccurate?
REPLY: The use of the quick numbers is to provide indications of developing trends, relationships, increases where there should be declines, or drops where there should be growth, product line sales and gross margins, out of sync issues, transactions not fitting into established classifications, growing liabilities or stagnating asset values.
QUESTION: How can managers possibly benefit from information that is wrong?
REPLY: Involved managers can review what they are provided using their knowledge of the organization, its operations and financial structure to detect unexpected or developing issues so an understanding of them can be uncovered earlier. This allows for unsatisfactory directions or positive trends to be acted upon or taken advantage of quicker. It is not expected that the managers will review the amounts without having anything register in their brains. “Knock- knock, you better be there!”
QUESTION: Shouldn’t they wait to receive accurate information?
REPLY: Management should receive accurate information quickly, and if they don’t, they are not doing their jobs well. However, I am dealing with reality and not ideals, and where accurate information could not be produced, alternatives must be developed so that controls can be maintained. My suggestion is one of those controls.
QUESTION: Can you define what you mean by wrong information?
REPLY: Wrong information can include financial statements that are cut off at the end of the month before all of the essential information has been entered such as purchase invoices, sales returns, bank transfers or letters of credit. This information is key, but sometimes current datais not available or is received “piece meal” from various sources. Also, many times inventory changes, accruals or prepayments are not properly or timely recorded or miss-postings are not yet corrected. Many businesses wait until all this information is received, calculated or analyzed before “closing” off the month and issuing the report. This can take a week or more after the end of the month. For a not-for-profit, it could be the entering of contribution pledges or cancellations, or allocating revenues or costs to program categories.
QUESTION: Assuming the information you described in the previous question is not entered or is wrong, what possible benefit can there be to using the financial statements?
REPLY: Actually, there can be great benefits, just that not for every item on the statement. An example is the key numbers being substantially, but not perfectly, correct. Sales amounts and month to month, or this month and same month last year, or sales by department or product line trends can still be examined and discussed. Likewise, for profit margins based on raw material purchased or received or variable payroll costs. Also balance sheet items can be scanned for large or unusual changes, and then discussed.
QUESTION: Are there any controls you can place over the “size” of the inaccuracies?
REPLY: A simple control is to look at the previous month’s numbers as adjusted a month later after all items are updated and comparing it to what was originally presented. This will show the materiality of the effect of the noncurrent statements. Repeated large misstatements can be provided for by recurring adjustments or special effort to work on these items timely, or to set up procedures to care for these items in a more propitious manner.
QUESTION: Is there anything else you want to add that wasn’t asked?
REPLY: Yes. The numbers – even though wrong – can serve as a catalyst to a discussion about the operations and what is going on with the business. I have seen many such discussions lead to disclosure of items that might not ordinarily be talked about. This is a process that works.
There are many other benefits and many other ways of analyzing interim financial statements and data. The above is one technique that has worked very well for me and the clients I consult with. Each organization and manager needs to develop their own methods. However, the method I mentioned by using quick and inaccurate numbers is very effective. If you typically receive tardy or late numbers, consider what I suggest.
Whatever method you use should be an effective tool to provide you with information needed to better run your business or organization. That is the goal and that is what you should strive for.