Why Accounts Are Not Effective

Coming from a qualified accountant you may find the above statement somewhat surprising. We looked at this topic before in Why Effective Leaders Don’t Use Accounts To Make Decisions and it’s time to look again. Let’s see why accounts are not effective.

All the old-fashioned banks would disagree with me. If you want to get anything from them (or indeed keep what they have already lent to you) they will demand accounts and probably the last three years of accounts. Using those figures, they will assess the health or otherwise of your business using the techniques they have known and loved for decades. If you are reporting to management or, heaven help you, external investors and especially the “market” you will need to show what has happened in the past and they will lap it up.

For a long time, I have been banging on about the past being no guide to the future and the fact that we live in a world that is changing faster than at any time in history but still people clutch accounts and believe in them like a frightened child grabbing their mother’s hand on a crowded railway platform. Well, here’s some hot news. If accounts were of little use for decision making when I wrote those words before, then accounts are now completely useless for decision making.

All accounts published during the next two years will reflect how well the business performed in an environment that no longer exists. Some did remarkably well because of lockdown, others remarkably badly but hopefully we won’t see lockdown again. Some did well because of ridiculously low interest rates and will now suffer hugely due to borrowings they cannot service. Some such as the car industry or property or banks have made huge profits because their clients / customers have been able to fund purchases that would normally be outside their reach due to low interest rates. With interest rates at their more realistic levels just watch demand collapse. Some have done well due to cheap, easily available energy that have either made production or transportation artificially cheap. Their accounts for at least the next two years will reflect these issues and not the ones we currently face. Even if none of those are true, we are now in a recession, the like of which we have not seen for decades. The accounts will not and cannot reflect this. How an organisation performed in good times is no indication of how it will perform in bad.

Even management accounts reflect the recent past and not the future and so are of limited use.

What’s gone is gone Why Are Sunk Costs Important?

Good businesses are the ones that can react quickly to changes and benefit from them. How well they do in the future will not be based on how well they did in the old world but how well they do in the new.

Accounts will become even more useless for business decisions as we increasingly see the use of AI and Making Tax Digital remove many of the requirements for financial accountants and bookkeepers. They will become a means of reporting to the authorities that the business complied with the law and that it has declared taxable profits correctly. Nothing more and we don’t ned people to do that.

We need people who can do something AI can’t. Effective people who look to the future, effective organisations that look to the future, effective financial data and the interpretation of that data to assist in those decisions. The good news is that AI can’t do that. The bad news is that the old banks and others will increasingly use AI and crude ratio based data to run their businesses and make decisions. The really bad new though is that if you can back up your decision with historic data and it goes wrong you have a get out. “It’s not my fault, we couldn’t see that coming, the accounts showed that all was well!!” However, if you make your decision based on an uncertain future How Risky Is The Future? you don’t have your excuse and if it goes wrong poor managers and bad leaders will employ the blame culture against you.

No matter what, it is true that accounts are useless for decision making and effective people and organisations understand that is truer today than it has ever been.

Surround yourself with effective people who look to the future and not those stuck in the past. We don’t need accounts or accountants. We need flexible, imaginative people who look to the future and most of all, we need effective leaders in business, in life and in politics.

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