History Vs Reality

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When information isn’t real-time

Timely and accurate information is the lifeblood of business. Whether it pertains to markets, customers or competition, information is the foundation of the decision-making process. The refrain “I need it now” echoes constantly through corporate hallways as executives and managers search for current reports or data that will enable them to develop and sustain a competitive advantage in the marketplace.

However, business owners may be shocked to learn that the information viewed as fundamental to their thinking is neither as accurate nor as real-time as they have always believed. Consequently, they are basing key decisions on incomplete analysis because something is missing, and that “something” is the timeliness of the material displayed on their desktop. Because of its immediacy, they assume that the material is current. Unfortunately, it’s an assumption with potentially serious consequences because the data is historical and may not depict what is really happening at that particular moment.

Information past and present

Since the late 1990s, the Internet began impacting the collection of business information, but its arrival did not mean that business was about to forego tried and true methods. There were (and still are) marketing studies, research reports, focus groups, sales reports, and even travel when necessary. Most of all, accounting reports became the ultimate data authority for many businesses in determining cash flow, expenditures and gross profit. Once reports were received, owners and managers could plan their next course of action to increase profitability.

There is just one problem: the accounting data is not fresh. In most cases, it isn’t available to the owner for 30 to 45 days, which is the usual interval from the start of the accounting process to final delivery of data. That may not seem lengthy, but consider what can happen in such a short time period. Just ask Toyota.

The Japanese automaker had been a leader in customer satisfaction surveys, so by year-end 2009, there was no reason for the company to alter what had been a successful marketing strategy. However, in the space of a few weeks in January 2010, consumer confidence seemingly fell into an abyss for Toyota following an onslaught of media coverage about recalls due to accelerator problems on a number of models and a braking issue with its best-selling Prius. According to The Wall St. Journal, Toyota sales subsequently fell by 16 percent in January, while sales and market shares increased for General Motors and Ford—a turnaround for all three that occurred in less than a month and that no one could have predicted just a few weeks earlier.

All of which brings us back to the accounting issue and its inevitable time lag. Most accounting software is based on generally accepted accounting principles (GAAP) that include some calculations for capturing real-time production activity. For that reason, it is common for many business owners and managers to rely on the accountant’s report as a primary business managing method largely because its accuracy is viewed as synonymous with timeliness—an invalid assumption for two reasons: (1) Accounting data tends to be historical in nature—usually the case when the analysis can only reflect what the company was doing 30-45 days previously; (2) Business is always fluid and moving so the report’s accuracy has a time limitation. There is no guarantee that figures represent the company’s revenue compared with expenditures today because variable and fixed cost billings have different cycles; for example, supplier invoices may be excluded from accounting data because they were not received by a report’s conclusion.

In no way does this suggest accounting reports should be ignored, but owners need to recognize that data, at least its timeliness, is subject to reevaluation especially when compared with financials—the information that provides an up-to-the-minute assessment of the real barometer of profitability, which is Return On Investment (ROI).

Rethinking ROI

The major difference between accounting and financials in ROI’s computation is use of pro forma as the basis for current or projected revenue. Unlike accounting, which is restricted to GAAP, pro forma figures can present ROI projections based on the impact of significant operational changes such as acquisitions or the emergence of serious problems such as those occurring at Toyota. This approach, at first, may not sit well for business owners who have never considered adopting pro forma financials and comparing them with statistics derived through GAAP.

Still, comparative analysis and measurement of ROI from pro forma financials merits consideration as an alternative. Management can examine all cost centers, whether variable or fixed, establish performance indicators for each of these centers (people and materials) and evaluate their respective ROIs. It certainly provides the owner with a more detailed picture that discloses the true extent of profitability for each cost center instead of a “one-size-fits-all” flat percentage.

Joseph Percario, a New Jersey general contractor, says he requires cost center information on a daily basis for his decision making because his business is so fluid, and he needs to know where and how to react. “We need to go from wide angle to zoom on what we can do better to produce a better result,” Percario says, “(and) this gives everyone on my team and in my company time (for) input and a team effort to adjust.”

Unlike Percario, some owners rely only on general business concepts as their foundation, and those lead to misconceptions about ROI and true profitability. This is especially true of those who equate increased sales with profit. They overlook the possibility that increased revenue can, and often does, obscure inefficiencies elsewhere. Other hidden barometers of profitability such as debt service and cash conversion cycles, two essentials for a truer picture of margin status and gross profit, do not show up on their radar screen because of their exclusion in GAAP calculations.

Immediate and essential information

For an accurate and timely statistical picture of a company’s profitability, it’s important for owners to insist on three essential information categories on a daily basis:

  • Cash Flow. When money is so scarce, there cannot be too much emphasis on liquidity. Owners need a daily comprehensive report on cash flow that takes into account all expenditures, including those that have been omitted from the most recent accounting statement.
  • Gross Margin. Without daily monitoring of gross margins, the loss of profitability can have a significant and long-term impact on the business.
  • Fixed Cost Capacity. This is one of the most important cost centers for companies and is why owners need to closely examine any analytics that can help reduce this overhead.

Some companies now offer incentives based on gathering real-time and accurate information and analysis of that data. These initiatives have led to improved performance, thanks to tracking systems that measure the impact of each cost center on a company’s ROI.

The best information that should be front and center immediately is ROI tracked on a timely basis. The issue here is nothing less than control of the company’s current performance and its future. Owners need to have the facts and figures of debt service and its correlation to real profit at their immediate access at all times—an unlikely prospect if the information is delayed until a report is completed.

Information is at its best when data provides a current big picture of the company’s ROI and performance. Anything less, such as an after-the-fact report that is more than a month old, is as outdated as yesterday’s newspaper. It would be a shame to waste all the high-speed technology at our disposal on any data that falls short of real-time.

About Jay Aldebert 1 Article
Jay Aldebert is a survey services director. Jay has analyzed more than 1,100 businesses throughout the United States and Canada.

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