Disagree with the Financial Analysis Results?
When you receive a financial analysis report or spreadsheet sometimes the results don’t always make sense. There can be many reasons for that. The reasons can fall into two camps:
- The data was flawed.
- The conclusions from the perfect data were incorrect.
Of course, both items can be incorrect at the same time. But suggestions on how to fix it should focus on getting the data corrected or more pure will be the only way to fix it.
In the first instance, the data is flawed or in a time worn saying GIGO (Garbage In, Garbage Out.) Here are some ways to fix that problem.:
Are the basic numbers right?
- Number of Sales. I know this seems silly, but you would be astonished how many sales invoices are prepared in QuickBooks that do not have accurate units listed. Consider if your sales department has been taking shortcuts in preparing the sales invoices.
- Number of purchases
- How much did each unit sell for?
- Are there accruals that are messing with the numbers?
- Are the comparisons apples to apples or apples to oranges? An an example would be a software company that sells desktop software and is switching to SAAS software. If they offered a free month trial, would the SAAS sales numbers be included in the numbers? What if half the customers canceled after the second month?
- Christmas returns in retail can be high. Is it fair to include the gross amount in December if half the products will be returned in January?
- Overhead incorrectly calculated. One of my favorite examples is a utility bill. The clients were coding the utility taxes to local taxes. So when the cost accountant did their calculation a third of the utility expenses were not in the proper expense account. I can understand coding it that way, but when it comes to general ledger coding you really need to take a step back and think about what you are trying to accomplish. Summarizing information in a useful and meaningful way.
- Delivery and Shipping expenses not accounted for. At least once a year you should compare the actual shipping cost to what is being charged to the customers. It isn’t against the law to undercharge the customer for shipping; but it should be done as a strategy, not through sloppiness.
In the second instance, you don’t agree with the conclusions. They just don’t make sense. What do you do then?
Blame the messenger. Perhaps they have noted a problem in your process. Perhaps they are incorrect. In this case review their methodology and process. In other words, review the logic.
Outside economic forces are to blame. A common example is that on Etsy has many low priced handmade goods. Knitted sweaters for example. I have spent some time knitting and know that it take hours and hour to hand knit a sweater. If we were required to knit our own sweaters, most of us would have only one. Or half a sweater. A great hobby, but not economical for retail. In spite of that obstacle, there are many hand knit sweaters that have affordable prices on Etsy. So, if someone was an awesome knitter and wanted to sell their goods on Etsy, how will they make a living? The market has moved the price point down.
- Sell knitting patterns.
- Use a knitting machine. It can create a scarf in an hour vs. a few days.
- Use cheaper yarn. Most of the yarn that is for sale is priced for the hobby market. If you buy from a whole sale yarn provider, the price is lower. (Hint: wholesales sell cones of yarn.)
- Outsource the knitting.
I think this is the hardest part of all. Consider if your opinions are incorrect.
How much money is in question? Consider that opinions might be formed on a few cents difference. Consider if that is a material difference.
An example of something that everyone knows something, but it isn’t true is a monthly lease expense vs. location. Is it better to get cheaper rent? Or is it better to get a better retail location and pay more rent? Choosing a retail location is based on demographics, visability, and traffic flow.
So, for instance, you would look at a neighborhood and say, that’s great. High wage owners, high home ownership rates, and a couple kids per household. Which describes my neighborhood. However, business after business dies in my neighborhood. Why is that?
- It’s a bedroom community for a large urban area. 60% of the workers commute for an hour or more to Seattle. Chances are they’ve already completed their errands during their lunch hour.
- Large malls are located to the north and south of the neighborhood. The smaller malls have been converted to big box stores. Mall traffic is diverted away from your smaller retail location.
- Zoning rules do not encourage businesses. Buildings are not renovated because of burdensome rules and regulations. For instance, new buildings need to a certain height. The precludes developers who need about 10 stories to have have a profitable office building.
- Since the available office buildings are ‘worn’ they cannot provide a nice shiny alternative to the brand new malls. Therefore, when consumers judge a business on the building, they choose not to visit because the location isn’t in mint condition.
Given that, would you locate your business in that area? Or would you be better off paying twice as much for retail location near the newer malls?
Some of the things that might change the underlying business model:
- Volume changes.
- Style changes.
- Market changes. (Bookstores)
- Labor cost changes. (Mandated sick pay, increased minimum wages, and benefits.)
- Ownership payments might be draining the business of needed capital. More common that you think it would be.
- Technology shifts.
I will leave you with this final thought. Perhaps the financial analyst has uncovered a new truth about your business model. Not all theories remain true under all circumstances. Perhaps there was a grey area that needed a little more light.
Last week we purchased a new dishwasher at Sears. The sales person struggled with the tablet and lost wifi service. So he moved to the cash register. A register right out of the 1980s, it even had an IBM logo on the terminal screen. He struggled to enter the information. The credit card did not exist. And then it did. He pushed the button to ring the sale. But the ancient dos system had included the installation charge. So he voided the sale. And then he rang it up again. Whew. Which was great. We got home and there was a call from Sears. Did we really order two dishwashers?
The Sears cost accountants had decided a tablet cash register was great, but didn’t pay for the wifi for it to work, left the old registers there, but the sales system had such a terrible interface that double orders happened. It wasted a half hour of our time, the clerk’s time, and the warehouse staff time. That was a fantastic set of cost cutting items that added up to a whole lot of time being wasted. 🙂
Latest posts by Laura Dodson (see all)
- Do Zero Based Budgets on Focus on Short Term Goals? - October 29, 2015
- Specific Goals! - October 26, 2015
- What is an Request for Proposal (RFP)? - October 14, 2015