You could be paying a heavy price for having a financial decision-making blind spot.
A lot of companies have Accounting Routines passed down by person to person and learned by rote, that provide a rudimentary accounting function which meets the minimum standard for tax compliance.
The way we always have done it here’ is not the same thing as global best practice.
‘The way we always have done it here’ makes them reluctant to try new things, and blind to the fact that often they are doing a great job of doing something that doesn’t make any sense of add value to financial decision making.
The thing is, the quality of your financial decision making don’t ‘show up’ as a line item in your P+L.
Nor does it ‘show up’ as a deductible item on your tax return.
The impact of financial decision making is hard to see, which makes it difficult to ‘pin’ on something or someone.
Whether you believe this to be true or not, every decision you make, every action you take has a financial consequence.
You might not be able to see it, but you could be paying a heavy price for having a financial decision-making blind spot.
The ‘price’ you pay is usually made up of inefficiency, waste and excess, which are intangible by nature. This makes it hard to put a value on, without thinking beyond a basic one-dimensional analysis of the P+L numbers.
The difference between what you actually made and what you COULD have made is an opportunity cost.
To use a simple illustration, if you had to turn down a $200 casual work shift to attend a free family BBQ you might say that it’s cost you $200 to attend the BBQ, but the loss in earnings is an opportunity cost – you won’t find it on your bank statement.
To work out the ‘opportunity cost’ you need a benchmark and/or a plan to compare your actual performance against. This adds layers of depth and a degree of complexity, which requires expertise to understand.
(Think of these like the foundations of a tall building. Then imagine that global best practice lies at a depth somewhere between scratching the surface and digging to China. Global best practice depth isn’t what your opinion says it is, it’s what the best companies in the world adopt. Unless you know what you are doing and dig to the right depth, your foundations will be shaky.
Let me give you a case study as an example. A client engaged me to (using a car analogy) ‘have a look under the hood’ of his business. This business had multiple locations along the east coast of Australia and turnover of almost $20M pa. But, something wasn’t right. They were all working their backsides off, but results were disappointing and unpredictable. He said it probably needed more than a ‘tune-up’, it was more like it ‘wasn’t firing on all cylinders’.
After putting his ‘car up on the hoist’ my analysis revealed they were probably down $500K pa in profit versus best practice.
Their senior people were ineffective in their pursuit of marketing targets. They had staff motivation issues, the projects were in control of them, not the other way and they weren’t strategic in they way the did pricing.
All things that can be fixed if you know what you are doing, but virtually impossible to see if all you do is stare at the P+L hoping for the answer to jump off the page and land in your lap.
So if you want to stop flying by the seat of your pants your business to grow on solid foundations speak to Custodian Backoffice about developing an financial decision making information ecosystem that spans the past, present and future, which will allow you to see where you are headed, stay on track and have enough time to make informed strategic decisions.