I heard a story at a Toastmaster meeting I was attending that piqued my interest. A ceramics teacher decided to split his class into two groups. One group was focused solely on the quantity of the work they produced and the other was focused on quality. When it came to grading time, he noticed that the works of highest quality were all produced by the group being graded for quantity. The “quantity” group had learned from their mistakes and improved each time. The quality group only had theories and little to show for their work. I did some research and found that this story came from the book Art and Fear.
You might ask what this story has to do with finance and accounting for business. There are many interpretations of this story that you can find online, but I am going to focus on consistency. I think that businesses improve when they have consistent reporting, metrics, and processes. I have come up with five reasons why consistency is important in any business, specifically from the finance point of view.
Lou Holtz said “In this world, you’re either growing or you’re dying so get in motion and grow.” I heard this from a small business owner this week and it got me thinking about momentum. As I start my business providing CFO services, I have a consistent process to reach out to a certain number of people a day and keep track of it. The consistent practice will build momentum and over time produce results.
Think about working out. If you exercise everyday, you build a habit and it starts getting easier. Once you stop working out, it can be hard to start again.
In business, monthly financial reports and a forecast model that is reviewed regularly and compared to last month, last year, and budget can provide the momentum needed to help you reach your financial goals. I have studied setting and reaching goals lately, and I think momentum is a huge part of it.
2. Trending and Analysis
In financial planning and analysis, trending is an important tool to forecast future months. It is common for me to go into a business and notice that revenue and expenses are not matching by month. I don’t want to get heavy on accounting but one principle to keep in mind is that revenue and expenses must match the period that they are recorded on the Income Statement.
I know in the media/marketing industry, it is common to have pass through costs that are billed to clients and paid back out to other vendors. If a client pre-bills and records all the revenue in one month, but the pass through costs are recorded in another, it is challenging to determine the revenue. For one thing, the revenue is not recorded correctly, but also the revenue will fluctuate each month simply because of the timing of the processing.
Consistency in accounting and reporting is essential each month so we can truly see how the business is performing and trend the revenue into future months.
Once certain reports and metrics are established, then consistency improves communication. It is essential that each month a business reviews the Income Statement, Balance Sheet, Statement of Cash Flow, and other Key Performance Indicators (KPIs). I wrote about KPIs on last week’s blog so check it out if you missed it.
Once everyone has been trained on how to review the key financial reports, the presentation, delivery, and commentary should be consistent so executives can quickly understand what is going on and make adjustments if necessary.
The most efficient process in any organization is one that has been fine-tuned and is repeated the same way each time. A consistent process decreases errors and can be quickly performed over and over without much thought. I am a firm believer in continually improving processes. Just as in the example of the ceramic pots, when a process is completed over and over, it is perfected and tweaked over time.
Develop a consistent month-end accounting and reporting process so that it can be performed more quickly, automated if possible, and it will be less error prone.
5. Bankers, Auditors, and Investors
One thing I know from generating and reviewing financial statements for over 15 years is that bankers, auditors, and investors do not seem to like surprises. They want the financials to consistently grow and for revenue, expenses, and margin to improve in a systematic way. Anytime revenue drops unexpectedly or there is a big expense in a certain month, it will have to be analyzed and explained.
Consistency is essential if you want to keep investors, the bank, or even auditors happy. They are trained to look for anomalies and any red flags.
In summary, consistency is vital for your business and financial reporting because it builds momentum, ensures more accurate trending and analysis, and results in more effective and timely communication across the company. Also, consistency will ensure a quality process and keep the bank, auditors, and investors happy.
I know for some of you it may seem like a long way before you have consistency. Maybe you are in the midst of a chaotic environment due to growth and inconsistency. Just like with the ceramics story, focus on quantity instead of quality. Start doing something today to improve your business reporting and analysis and you will get better with time. With each passing month, the exercise will deliver unexpected results and the chaos will decrease.