As an accountant I like nothing better than a good set of numbers to consider. The problem is that numbers are only meaningful if they are used for the purpose for which they were prepared. That’s why we must remember that accounts are not designed for effective decision making.
The problem with accounts is that they are historical. At best they tell us what the business did and may help us with some sort of trend analysis. Using accounts for any form of decision making makes one fundamental error. It assumes that the past is some guide to the future. In our blog Why Accounts Are Not Effective we considered the problems and now is the time to consider them further.
Accounts are designed to tell us what happened in the past, keep our tax as low as legally possible and comply with statutory requirements.
In order to make good decisions we need to take into account what has happened in the past but not use it as a basis for the future. To do that would be to ignore the truth about the environment of change in which we find ourselves. What we need are good internal management accounts and projections.
Often when speaking with the management of organisations they have problems with projections especially if they show a completely different situation to that in which the business is currently operating. Often the sad old phrase of “all forecasts are either lucky or wrong” is brought out in order to justify basing the future on the past and not “wating time on inaccurate forecasts.” Of course all forecasts will be wrong. That is not the issue. All that matters is by how much they are wrong and how quickly the organisation can adapt to the changes. To be effective we need several forecasts, not just at different levels of output but for different scenarios. Banks and some other financial institutions love accounts, they understand them and they give them the “IBM” excuse. You remember the one, “nobody ever got fired for buying IBM” well convert that to banking speak you get “nobody ever got fired for backing a previous winner whose accounts passed credit checks”
In the next blog we will look at effective information rather than historical numbers.
To take effective decisions we need as much future information as we can possibly get and not base tomorrow on yesterday. If I buy a financial services product it always says ” past performance does not guarantee future results.”
Maybe it would be a good idea if we made it a legal requirement to put that on all sets of accounts!!!
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