ONE OF THE CURRENT hot-button subjects in the world of business is tied to the phrase “cooking the books.” I can’t imagine that there is a single businessperson in the nation who does not understand that this phrase involves the manipulation of corporate financial statements to achieve a more palatable published result.
This means adjusting the financial numbers to the advantage of the owner or operator of the business. It is greed and gain for the few at the expense of the average investor.
It happens all the time in our broad PHC industry, and at every level.
In the early days of this column I tried to review the financial information of successful or evolving-to-success companies as positive examples from which we all could learn. One of the first things I realized was that I could never accept verbal statements; I could only review, for publication, companies where I had copies of several years’ financial information.
To be precise about the information I was presenting, I would have a recorded telephone interview with the company owners to discuss their numbers. It was a positive two-way street. Anyone who participated received good value for the modest charge. It was not a moneymaking scheme at the start, thus I was never disappointed. I charged people to separate the serious from the frivolous and to slow down what could have been a blizzard of bogus paper.
From this rather lengthy exercise I developed several conclusions that continue to guide me.
1. The strongest, best-managed companies I know or have worked with in the past have good accounting procedures. They know where they have been, what they need to do to continue and where they are going.
2. Sloppy accounting leads to sloppy operations and a lack of control of profitability.
3. Lazy and dishonest employees are quick to take personal advantage of a lack of adequate controls. This always happens at a great penalty to the business and creates an almost impossible barrier to success.
4. Inventory as a line item on the typical balance sheet is truly the bastard child of hard goods control. I have encountered misguided souls who have manipulated the inventory number in both directions. Some may have tried to, in effect, work “both sides of the street” by understating inventory numbers for tax purposes and overstating the value of such a financial skullduggery in their private verbal assurances to other stockholders that the business is “doing much better – wink, wink – than the books say.”
In reality, an accurate inventory is usually the first indication that there may be a “hole in the boat.” No one ever sneaks into your shop in the middle of the night and puts inventory on your shelves. In the course of business I have never found inventory numbers to be conservative. During a good year, the owner, with a slight tinge of larceny or with mistrust of what seems to be a highly profitable year, will “take the inventory himself” and use the “plugged” number, which is created to produce what I have heard called in polite circles “internal reserves.”
5. To grow properly, you must insist that conservative accounting is accurate accounting. I have consulted in another industry where theft is so attractive and so pervasive a reality that in order to exert reasonable controls it was necessary to do what any of you would consider to be a hard-assed year-end closing every week! Every Monday morning the top executives of this dynamic corporation knew the profitability of the company for the prior week, the month to date and the year to date.
More importantly, they were operating with live numbers in a time span where they could sense problems while they were still just problems and not a disaster.
Contrast this type of intense record keeping and reporting with some contractors and wholesalers, of all sizes, who never know where they are financially and, in reality, seldom know where they were from the first day of operation to their “what the hell happened to us?” final shutdown.
I have known and interviewed successful tract plumbers who remained profitable because they exercised total cost control. In tract work, wherever possible, plumbing trees were assembled with shop labor and sent to the job with a bag containing the exact number of fittings necessary to install the assembly.
Further, they knew the exact number of direct labor hours applied to any given home and tracked that number against the budget for that total tract project.
If the business is an automobile, most contractors are attempting to drive using only the information available through the rearview mirrors as reflected months ago! Think of running the nation by only looking in history books and archived documents.
I’ve said this before: Too often your financial information is so ancient and so manipulated that it provides no management guidance and it is mistrusted even by the manipulators!