Steve Pipe explains why accounts are fundamentally flawed, and what you can do about it
Over the past 20 years I have surveyed thousands of accountancy firms and found that at least 73% of their partners (the people who make their living producing annual accounts) acknowledged that there are at least five fundamental flaws in annual accounts.
A few weeks ago I repeated the survey with 30 more partners and found that nothing had changed.
Of course, 73% of accountants are not saying that accounts are wrong, don’t add up or don’t fully comply with all the relevant laws and reporting standards. What they are saying is that annual accounts are of little or no use to the businesses that are forced to pay for them since they don’t give business owners the information they really need to drive their businesses forward.
Annual accounts are fundamentally flawed because they…
- Don’t make easy reading.
- Don’t show how well a business is doing compared to others in the industry.
- Don’t identify strengths and weaknesses.
- Don’t identify the scope for improvement.
- Don’t support decision making.
- Don’t show all the numbers that matter.
- Too many of the numbers they do include are based on judgement.
- Most of the numbers are seriously out of date by the time anyone sees them.
Some accountants believe that this is not their problem. After all, they argue, they are producing fully compliant accounts, so why should they do more? The answer is simple… to stop there is to let clients down. Businesses deserve and need more from their accountants.
What accountants are doing about it
Many accountants are rising to this challenge by adding a ‘Financial Performance Review’ to their accounts – namely, a plain English supplementary report containing relevant and useful graphs, ratios, sensitivity analysis and commentary.
And others are also adding benchmarking information to their accounts – most usually in the form of a supplementary plain English report that explains how the business compares with others in its industry, its key financial strengths and weaknesses, how much additional profit the evidence shows they are missing out on, and how they can reclaim those missing profits.
This type of report can be produced in minutes using the new breed of practice support software now readily available. And not only do they deliver new insights and real value to clients, but they also differentiate the accountants producing them. As a result, they make it much easier for firms to win new clients, keep existing clients and charge premium prices.
Why we must do even more
Worthwhile as these two supplementary reports are, in my opinion they do not go far enough.
I believe the profession needs to deliver a new type of performance measurement and improvement system (‘PMI system’) that picks up where traditional accounts leave off.
This new PMI System approach builds on what accountants have always done – but starts where traditional accounts finish. And essentially it is a nine-step codification of best practice.
The nine steps to best practice
Step 1: Work out where you are and where you want to be – by setting your goals and comparing them to your current position
Step 2: Create a plan to get you there – by producing a medium to long-term business plan and chunking it down into short-term forecasts and budgets.
Step 3: Measure how well you actually perform each month – using a combination of traditional management accounting information and other key performance indicators, so that you have your finger on the pulse of everything that matters. And then use that information to fine-tune your action plans.
Step 4: Measure your full year’s performance – by producing full financial accounts at the end of the year, as required by law.
Step 5: Evaluate your performance by comparing to previous years – so that the underlying trends are crystal clear.
Step 6: Evaluate your performance by comparing it to the rest of your industry – using benchmarking to identify your strengths and weaknesses.
Step 7: Estimate how much your business is worth – so that you can assess how well you are creating value for the business owners.
Step 8: Calculate how much more profitable and valuable your business could be – use everything you have learned about your own performance and the performance of others to estimate how much more successful your business could be.
Step 9: Develop a performance improvement plan – that is an action plan setting out precisely what you are going to do to improve your performance and ensure you achieve your goals.
Of course, some accountants will argue that they already help their clients in these ways already – and that may be true. But it is not about doing it some of the time for some clients. It is about doing it all of the time for every single client, because every single client deserves this sort of input, guidance and support.
All really successful businesses recognise that the traditional profit and loss account and balance sheet do not give them enough information to really drive their businesses forward. Therefore all really successful businesses also measure other key success drivers (also known as key performance indicators or ‘KPIs’) so that they can really understand what is happening while there is still time to do something about it.
The only information traditional management accounts give about sales is the value of invoices raised. But for many businesses that kind of backwards looking ‘lag indicator’ is not very useful for understanding what is already happening, or predicting what will happen next. Much more helpful for managing sales are key success drivers, such as the number of sales leads, the conversion rate from lead to sale and the size of order books. So most successful businesses now systematically map out and measure those kinds of key success drivers, too.
In fact, the most successful businesses now systematically identify and measure key success drivers/KPIs for every key area of their business. And the new breed of PMI systems now being used by forward-thinking accountants help other business become more successful by doing this too.
Numbers, numbers, numbers
When you think about it, just about everything that really matters in a business can be measured by a number. Some of those key numbers may be obvious, such as the number of customers, sales, profits and your tax bills. Some are a little less obvious, such as how many hours you have to work a week, and how many weeks holiday you can take a year.
And some of the key numbers can only be measured on a more subjective 1-100 scale, perhaps including customer satisfaction levels, team morale and your personal happiness.
But everything that matters can be measured by a number. And here’s the really important part: I have never met a business that doesn’t want to change some of those numbers – whether it’s the number of hours they work, the number of customers they have or the number of pound notes they have in the bank. Every business wants to change the numbers.
So in my opinion that is what accountants should be doing… using their skills with numbers to help clients measure and change (ie improve) the numbers that matter. In fact, to me it is what accountancy actually means – changing the numbers. Not through creative accounting, of course. But by using our understanding of what lies behind the numbers to help bring about real change.
And that is why the nine-step PMI system approach is so valuable to clients– because it helps businesses understand and change the numbers that really matter to them.
It is also why it is so valuable to the accounting profession – since it builds on our measurement skills, and applies them to the areas where clients really need help. The areas where clients can’t do it themselves by pressing a button in their accounting software or outsourcing to India.
So it creates an exciting and profitable new role for the profession. A role that really makes a difference. A role to be proud of.
- Steve Pipe FCA is a leading researcher. Contact him via email@example.com and at www.stevepipe.com
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