Accountant’s angst

Someone who should probably know better once accused me of suffering from “accountant’s angst”.

If that’s something that you can actually “suffer” from, then I plead guilty as charged. I have a strong belief in the mantle that if “you can measure it, you can manage it”. And my accountant’s angst has caused me to compare the challenge facing owner-managers attempting to save their business with the government’s attempts to eliminate Coronavirus.

High-performing businesses measure absolutely everything. Here’s how it works:

• Set some goals
• Identify performance levels needed to hit those goals
• Write a plan to hit those performance levels
• Follow the plan but measure the results.
• If the results are not showing the improvements required – tweak the plan.

Governments around the world are attempting to follow the same strategy to deal with Coronavirus with mixed results. Like your business, their numbers fall into three broad categories:

• The end result
• The big picture
• Key Performance Indicators

The end result 

For the politicians, the “end result” for measuring the impact of Coronavirus is literally that. The number of people who have met their end i.e. deaths.

But in terms of measuring the impact of particular policies, this data is woefully late. People will have caught the virus many weeks earlier. And the conditions that caused them to catch the virus will have been set many weeks before that. The number of deaths tells us what we should have done two months ago, not what we should be doing now.

The end result for a business is its cash flow. The amount of money you have in the bank.

There are still many businesses who measure how they are doing by how much money they have in the bank. But this is usually misleading.

I once acted for a retail business with terrible accounting records (nothing I said was ever going to change them) whose cash flow had massively improved over the previous 12 months. A bit of digging uncovered why.

We soon realised that the reason was simply because once they had filed their first year’s accounts, their suppliers offered them much better payment terms, so they had been racking up debts to their suppliers which had disguised the losses they were really making.

They were past the point of return unfortunately.

Because like deaths from Covid-19, cash flow is simply a consequence of many other things that took place months earlier. Like my retail client, if that’s all you measure then by the time you realise you have a problem it may be too late.

The big picture

Seeing the big picture regularly will help.

The big picture for Coronavirus is the number of people with it or who have had it. That information tells us all sorts of things not least the likely percentage of people who will die. All sorts of forecasts can be done based on that information and better quality decisions should be made. Keep the number of people being infected low then subject to a few other variables (quality of medical treatment) then deaths will be low.

The big picture for a business is usually its profit and loss account. If you make a consistent profit, then subject to a few other variables (good billing and credit control systems, suitable arrangements for financing growth) then cash flow will usually take care of itself.

Key Performance Indicators (KPIs)

KPIs are the statistics that can be measured on a daily or weekly basis that will determine your overall success.

In measuring the success of different policies to tackle Coronavirus, the critical number is what they call the R number. It’s the average number of people that each person who catches the disease infects i.e. the Re-infection rate (or maybe it’s the Re-production rate – I’ve read two different explanations!).

It’s quite a simple theory. If R is above 1, then the number of people with Covid-19 is increasing. If it’s below 1 then it’s falling. Keep it below 1 permanently and it will eventually die out.

The national debate is currently about how long the lockdown goes on, what should be eased and what shouldn’t. The answer lies in the R number. If we can find a way of living that keeps R below 1 but allows the economy to get going and all your businesses to be operating profitably then eventually the number of cases will fall to such a low number that we have a chance of eradicating it completely.

R = 1 is effectively the break-even point for Coronavirus.

The equivalent of R for a small business would be “Average Daily Turnover” (ADT).

For retail businesses this is fairly simple. It’s your takings net of VAT. If it’s below the break-even point, then you are losing money.

But most of our clients are service-based businesses and for them ADT is the value of work conducted that day.

If you have a time ledger or job costing system like Workflow Max, this can be measured relatively easily but most companies don’t have that. An example of the alternative way to work it out might be:

If your real break-even point is ADT of £2,000 then you’re losing money. If your Real break-even point is £1,800, you’re ok.

The thing about both ADT and R is that they are both hard to measure. ADT requires you to calculate your Work in Progress weekly and R requires a lot of testing data to be analysed.

Or maybe it’s because the people producing the numbers don’t take the time to explain the meaning or implication of those numbers. I was tempted to say that the government doesn’t trust the public to know their Rs from their elbows but that would be way too corny!

Going local

But it’s worth taking the time to calculate these numbers because they allow you to act quickly.

One client we have worked with extensively has a weekly ADT. Each time there has been a blip, we’ve discussed the reasons. In one case we identified that the workload of the engineers was being impacted by work not being planned the week before. In another case, we identified that problems with customer’s keyholders was part of the problem. In each case, changes were made to the way of working which eliminated those problems and increased ADT.

We’ve now moved on to calculating the ADT per man day to eliminate the impact of holidays and training days.

Where it gets really powerful is if you can work this stuff out per department, location or even per person. This allows you to identify under-performing sections or people and tackle the problem appropriately.

For the R number my accountant’s angst tells me that the government should go more local with their measurements. Imagine if every region knew that if they kept their R below say 0.8, that the next step on easing lockdown would happen. That would create a local peer pressure to stop parties or other activities likely to spread infection.

Yeah, I know – there’d be uproar.

Perhaps the problem is that government by numbers has historically not won elections or dare I say referendums. George Osborne tried that in 2016 and was drowned out by accusations that he was peddling “Project fear”. Most people are too busy to get their head round the numbers.

But my gut feeling is that people might view things differently this time. It’s so much more important and we’ve all got a bit more time to get our head round things.

In just the same way as we got everyone behind the “ADT per man” figure in my client, maybe a bit of accountant’s angst could rub off on the entire country and we could all focus on what we could do to keep R below 1.

Maybe we just need a slogan to wrap it all up in a way that everyone will remember. If so, how about:

“Get your Rs in gear and everything will be ok in the end.”

Have a good bank holiday weekend. We’ll be back on Monday night.