Always Learning
Learning has always been something I enjoy and pursue. I was kid reading the encyclopedia for for fun as an elementary school student. Life is about always learning and never accepting that you know enough about anything.
More recently, I am reminded of how learning often comes in layers and waves. Things that you learned at one time are often reinforced, expanded or otherwise differently illuminated at later times and through later experiences.
Here are a few basic principles that my current employment has brought back to mind recently:
Double-entry accounting has been around for a very long time. The recent advent of computer systems for accounting has not changed the basic form or function of double-entry accounting, but it has made it easier to do accounting poorly. Quickbooks is so wonderfully flexible that you can do bad accounting a hundred different ways.
A good set of books is a library of stories recounting the history of the business. Each transaction is an episode in the life of the business. Each financial report gathers up groups of episodes and explains the activity of the business for a given period of time. The accounts involved in each transaction and the amounts involved all factor in to what is being communicated in that particular part of the story.
I learned this way of seeing accounting from Dr. Lemler, my professor for finance in my MBA program. Dr. Lemler taught us how to extrapolate a cash flow statement from a pair of balance sheets and an income statement. He then gave us an assignment with a beginning and ending balance sheet and an income statement and required us to create a statement of cash flows from scratch. The assignment was the hardest project of the entire MBA program...and the most rewarding.
When you finally see how to undue the accrual entries (e.g. depreciation, amortization, etc.) from the income statement to see actual cash movements, you begin to appreciate how the books tell a story. When you analyze transactions using T frames to see how the transaction balances and what accounts are needed for a complete transaction, you start to appreciate the vocabulary and grammar of a properly constructed bookkeeping sentence.
Of course, once you learn how to "read" the books, you also see how jarring and ugly bad bookkeeping can be. I recently reviewed a truly bad transactional sentence. I knew in reality that the transaction involved payment on a liability by check. What I "read" in the accounts was that we deposited money in a bank account that doesn't actually exist while increasing our accounts payable. It is truly amazing what Quickbooks will let you do.
Moral: Learn the language and use it properly! Tell a good story!
Tools have always been one of the defining traits of humankind over the animal kingdom. In the 21st Century, the tools available through computer technology are growing and multiplying so fast it is impossible to keep up. However, one core principle rings true no matter if the tool you use is a hammer or a database. Tools work best when used for their intended purpose and according to their design.
I do most of my own handyman work at home and on my car, so I am undeniably guilty of using tools in ways they were never intended to be used. Screwdrivers become chisels. Wrenches become hammers. And of course, when all you have is a hammer, everything problem starts looking like a nail.
The same is true with business tools. Quickbooks can be used for all sorts of things that have nothing to do with accounting. Spreadsheets can be used for desktop publishing. Email systems take the place of document retention systems. If it works, it works...to a point. However, using tools ill-adapted to the actual use always comes at a cost.
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Another business tool problem involves the quality of the tool. Outlook and GMail (meaning the interface, not just the email servers) are both useful tools with helpful features. They are each designed to function in a particular way. The qualities of each system will determine which one is best for a given business context. The same is true for using SalesForce as opposed to a more industry-specific CRM system. Then there is the quality factor of tools in the same space. Some tools simply perform better than others because of quality design.
When dealing with digital tools, quality also involves updates. The rapid rise of SAAS tools accommodates the pace of change in technology by providing tools that are continually updated as they are used. The days of buying out-of-the-box software with annual updates are already over for serious businesses and will soon be extinct for everyone else when the software companies stop offering out-of-the-box options.
Interestingly enough, even tools that have made the leap from traditional software to subscription SAAS often fail to fully improve the quality to modern technology standards. One system that I have been dealing with was originally built as a custom Microsoft Access database and has grown into a subscription SAAS. Unfortunately, the data architecture inside the tool is still structured like the old Access model resulting in all sorts of goofy reporting results. Additionally, for us (the customer) to get all the information we need from this tool, we have to separately access four separate systems. One is the customer account system where we get billing information for our subscriptions. Another is the core operational system that we use daily for our service business operations. A third is a customer portal where we order pre-printed materials on which the core system prints account-specific and service-specific information. Finally, there is the payment processing system where we have to go to get detailed information about our credit card transactions. Current data management technology could easily integrate these different systems providing us (the customer) with one system to access where we can get all of our relevant information. Unfortunately, our vendor doesn't see the value in the little bit of development time it would take to share the data across these four separate platforms. Frustrating for our company, and motivation to me personally to look for a better quality tool.
Finally, no tool will work well if used incorrectly. Quickbooks can only tell your financial story well if the individuals writing the story use the language properly. Reports will never be helpful if they are drawn from bad data or poorly designed queries. Shifting the context a bit, brushes, paint and canvases do not create art. Artists create art. And the more skilled the artist, the better the art. Tools are great, but they do little to improve your business if you do not have people with the skills and motivation to use them properly and to positive effect. A tech friend of mine one told me that most computer problems are caused by the nut between the keyboard and the chair back.
Moral: For best results, invest time and money in implementing the right tool with the right training and the right people. The stool needs all three legs to work.
The old familiar joke recounts a discussion between a businessman and his accountant. The accountant explains to the businessman that he is losing five cents on every dollar of sales. The businessman is nonplussed. "I'll make it up in volume," he says.
Business metrics abound, but knowing which metric to use, and when, is far more important than simply having a metric. For example, our company's top-line revenue decreased significantly from 2019 to 2020 with almost none of that decrease related to the COVID-19 epidemic. On the other hand, our bottom-line earnings-before-taxes increased. Stressing about a decrease in revenue would entirely miss the more important reality that operational expenses were too high in 2019. Our 2020 was a purge year in which we were able to cut out a lot of excess expense making the company more profitable even with less overall sales.
The point of the old joke and the example above are the same. Margin is everything. If you aren't making a profit on each unit you sell, you likely aren't making a profit at all.
Another example is how we have been evaluating the value of attending trade shows. Our current litmus test is to see if we generated more gross revenue as a result of the trade show than the trade show actually cost us. Here's the problem with this approach. We are in a mature industry with thin margins. If we pay $2,500 to attend a trade show which results in $3,000 of sales, we still don't have enough information to know whether the trade show was worth it. If we add that for each $1 of sales, $0.50 will renew for three years and $0.90 each year will go to cost of goods sold and operational expenses, we now have enough information to evaluate the trade show. Of the $3,000 in sales, only $300 is profit. Of the $300 in profit, only $150 will renew for two more years. The trade show earned the company $600 of margin at a cost of $2,500. Put another way, the trade show cost us 8.33 years of profit on each account sold when assuming that every dollar of sales renewed annually without a cancel.
I realize there are other reasons to attend trade shows that may be worth the expense. The point of the illustration is to highlight the importance of evaluating investments and other expenditures in terms of the margin produced rather than on revenue.
The whole purpose of business is to generate a profit. Generating profit is all about margin. The businessman in the old joke will only accelerate his bankruptcy by increasing volume at a loss. A wise investor will pick a company with $1 million in assets, $1 million in revenue, and $150,000 in net profit over a company with $10 million in assets, $10 million in revenue, and $300,000 in net profit. Such a wise investor understands that 15% profit on $1 million of assets is a far better company than 3% profit on $10 million of assets.
Moral: It's all about the margin.