In this second blog on the impact of Timeliness, the “Score card” nature of the P&L and the need to de-consolidate on it’s usefulness.
Small businesses especially owner managed ones are highly dynamic and task oriented. Many such businesses measure performance dynamically as well often using cash flow on a day to day or week to week basis – the P&L is mainly associated with statutory accounts. As a business becomes more established and is split into functional areas P&L and Management Accounts become more prevalent, and by reducing most things to money it at least gives a standard unit for measuring each area. Equally the Accounts help to show commitments of others to the business and the businesses commitments back, if one is going to collate all these commitments some time frame has to be selected and this tends to be by calendar month or on the 5,4,4 week pattern.
The P&L is a useful document and tells us relatively unequivocally whether we are winning (a profit) or loosing (loss) but only when the company pays everyone when it should and is paid on time in return. In addition to do all the collation and conversion to money terms most small businesses take between 2 and 3 weeks to complete the accounts aft
In many businesses the time cycle of a business task is days or a week. Equally the inputs and outputs of these tasks as perceived by workers and supervisors is not financial – it is in the form of jobs done, material used, labour hours, shipments made etc. Thus as you get closer to the actual work the P&L frequently becomes less relevant because:-
- It refers to things that have happened at least 2-3 weeks ago and maybe as many as 7 weeks ago.
- It bundles up all the months activities together – it does not say which activity was good and which was less good.
- The unit of measure is £ but many departments work in units of kgs (raw material), hours (labour) etc.
Interestingly to construct the collated financial report that is the p&l the data from multiple tasks has to be consolidated, and the weights and hours have to be counted (to turn them into £). And if the data were captured in real time it would save on all the counting at month end and help the accounts to be issued sooner.
I would maintain that keeping a real time measure close to where the work is done is useful in helping people understand whether things were going well or not. These issues do not have to be complicated – for example a metalworking client had scrap collected by a contractor – the scrap bin was out of sight in the yard. Material usage was climbing but it was difficult to understand why – supervisors decided to lock the yard scrap bin and put a small scap bin in the factory where everyone had to walk past it – scrap halved in about a week with no further action required by the supervisors. Another company spent a significant amount of time every month deciding what was shipped and could be invoiced, by using the operations managers activity plan (on which he crossed off completed activities) the finance team could quickly decide what was invoicable. In the same company the simple addition of labour and material plan to actual on the managers activity plan allowed him to have a real time measurement of how the month was progressing.
So why not use the data that has to be collected and consolidated for the P&L or Management Accounts for a simple at source KPI.