Traditional Accounting Gets in the Way of Understanding Business – Again

Traditional Accounting Gets in the Way of Understanding Business – Again

 A client of Kaizen Institute became understandably concerned early this month when they looked at their financial accounts for July. Compared to the previous two months, sales and gross profit had dropped substantially. I was asked to help them work out what was happening.

After a few hours of investigation along with the accountant, it became clear that in fact not much had changed in the underlying business. Another thing that hadn’t changed was the somewhat arbitrary nature of the way invoicing is done on jobs that span multiple months. The arbitrariness had contributed to very uneven invoicing leading to the previous two months being unrealistically high and the latest month unrealistically low. So not only were the monthly accounts for the latest month not a good representation of underlying performance, but neither were the two previous months!

A further issue uncovered was the timing of when products were classified as now “sold” for accounting-driven Cost of Sales purposes. The combination of these two meant the true trend in overall sales and gross profit is actually very hard to discern.

So drawing on Lean accounting principles, reports are being built right now to look at cycle times for jobs, covering when products are procured and when the cash comes in from clients. The processes for booking goods to the jobs and for invoicing the clients are also being looked at to ensure there is a standardised approach designed to encourage minimisation of the time between paying and getting paid.

These new reports are not built in or even part of the financial reporting system – but they are what the decision makers in the business need to actually manage the business; and because they are based on standardised processes that are driven by the underlying process’ cycle time and not the financial month, they make sense to run regularly and frequently to keep a real finger on the pulse of the business.

Are you relying on financial reporting that makes good decision making hard?

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