THE BUSINESS WE MEANT TO BUILD

How good businesses lose their way

Chapter 10 – The Decision Before the Number

One of the more interesting moments in an accountant’s life comes when a business owner looks at a set of figures and asks, “How did that happen?” The question might follow a disappointing profit, a shrinking gross margin, a bank balance that seems remarkably uninterested in how hard everyone has been working, or a tax liability for which nobody appears to have put any money aside. The numbers are sitting there on the page as though they have somehow committed the offence themselves, and for a brief moment there can be a temptation to interrogate them as the guilty party. Unfortunately, the numbers usually have a very good alibi because they were not there when the decisions responsible for them were made.

The profit and loss statement did not decide to discount a job to win the customer. The balance sheet did not decide to buy the new vehicle, employ another person, allow a debtor another thirty days or keep carrying a product line that had stopped producing an adequate margin. The bank reconciliation did not decide that the money sitting aside for tax could probably be used for something else for a few weeks because another payment seemed more urgent. By the time those decisions eventually appear in the accounts, the numbers are doing little more than reporting from the scene.

That is why I have often thought we place the accounting process in the wrong part of the business conversation. We talk about the numbers as though they arrive first and the decisions follow, when much of the time the opposite is true. A large part of an accountant’s work is looking at the financial consequences of decisions that were made days, weeks or sometimes months earlier. The accounts may provide the evidence, but the business owner, the staff, the customers and the decisions made between them have already written much of the story.

There is a companion thought here to something I have written about elsewhere in The Numbers and Decisions. That article considers the importance of understanding the figures well enough to make better decisions, and I remain firmly convinced of that principle. This discussion is the other end of the telescope because, before a number can help us make tomorrow’s decision, it is worth understanding that today’s number may already be the child of yesterday’s decision. If we only ever look from the number forward, we risk missing the behaviour that created it in the first place.

Consider gross profit for a moment, because it is one of those figures accountants can make unnecessarily complicated if we are not careful. A deteriorating margin may certainly be caused by external pressures such as supplier price increases, changing competition or movements in the market, and those factors should not be ignored merely because they sit outside the business. It may also be the result of something much closer to home: prices were not reviewed, discounts became habitual, wastage increased, quoting became sloppy or somebody became so determined to keep turnover growing that margin quietly became the sacrifice. The percentage eventually appearing in the accounts is not the event itself; it is the measurement of a series of events that have already occurred.

Cash flow provides an even better example because people often describe cash problems as though the money itself developed an attitude. In reality, poor cash flow may have begun when payment terms were agreed, when invoicing was delayed, when debtors were not followed up, when drawings increased, when stock was purchased or when a major commitment was entered into without considering what else would fall due at the same time. None of those decisions necessarily looks catastrophic when considered in isolation, and many may have seemed entirely reasonable when they were made. Stack enough of them together, however, and eventually the bank account provides a remarkably accurate summary of the choices that came before it.

There is a particular danger in concentrating so heavily on the eventual figure that we forget to examine the smaller decisions that accumulated to create it. A cash-flow problem rarely begins on the morning the bank account becomes uncomfortable, just as an inadequate margin rarely begins on the day the accountant finally calculates it. Somewhere earlier there was probably a quotation, a purchasing decision, a payment term, an unnecessary expense or a conversation that was avoided. The number simply becomes the point at which all of those smaller choices are finally forced to introduce themselves.

This is where the Discipline of Boring becomes far more important than its name might suggest. Sending invoices promptly, reviewing debtors, checking margins, reconciling accounts, providing for tax and looking at cash commitments before spending money are not the exciting parts of running a business. Nobody is likely to fill a conference centre by promising the life-changing experience of completing the bank reconciliation on time, and I am yet to see a motivational speaker standing beneath stage lights promising ten-times growth through accurate debtor follow-up. Yet these ordinary disciplines have a remarkable habit of influencing the extraordinary number of problems that appear later.

Perhaps the real value of good financial information, therefore, is not merely that it tells us where we are. It provides an opportunity to trace the road backwards and ask how we arrived there, rather than immediately attacking whatever number happens to be unpleasant. A falling margin invites us to examine what changed in pricing, purchasing, quoting or delivery, while rising wages may lead us towards questions about productivity, staffing decisions or whether growth required people before the revenue needed to support them had arrived. A growing debtor ledger may be less about the effectiveness of collections than about the kind of customers the business has chosen to accept and the terms it was prepared to offer them.

That distinction matters because otherwise management can become an endless exercise in treating symptoms. We see the number, react to the number and attempt to change the number without necessarily examining the decision that produced it. If labour costs are too high, someone decides labour must be cut; if sales are down, someone decides marketing must increase; if cash is tight, someone starts looking for finance. Each response may ultimately be appropriate, but I would want to understand the decision that created the problem before assuming the first visible solution is the right one.

It is one of the reasons the idea of acting as a “silent” partner in a client’s business has always mattered to me. The most useful question an adviser can sometimes ask is not simply, “What do the accounts say?”, because the accounts may only be describing the end of a much longer journey. The better question may be, “What happened before the accounts said it?”, which can lead into conversations about prices, customers, staff, capacity, debt, drawings, equipment, systems or simply whether the owner has been saying yes too often. The accountant does not need to make the decision for the owner, but there is considerable value in helping them identify where the decision actually occurred.

That leads naturally to another question that I suspect is more useful than it first appears: what number are we creating now? Every quotation being issued today is helping create a future margin, and every new employee, loan, discount, lease, subscription, debtor term and purchasing decision is already beginning to write a line in a set of accounts that may not be produced for months. The number does not yet exist on paper, but economically the first part of it may already have been created. Looking at business that way turns accounting from something that merely records history into something that can sharpen awareness before history is written.

It is also important not to turn this into the comfortable arrogance of hindsight. Not every poor number was created by a foolish decision because businesses operate in uncertainty, and decisions have to be made before all the facts are known. A sensible decision can produce a disappointing result, just as an irresponsible decision can occasionally be rescued by good fortune. The purpose of looking backwards is not to convict ourselves with information we did not possess at the time; it is to understand whether the decision was reasonable, whether the assumptions were sound and whether there is something worth learning before the next decision arrives.

CANEI, Constant and Never-Ending Improvement, belongs naturally in that conversation because improvement does not require every disappointing number to trigger wholesale reinvention. Sometimes the underlying process is fundamentally sound and simply requires refinement, discipline or a better question at an earlier point. Perhaps the quotation process needs a better margin check, the debtor system needs an earlier reminder, the purchasing decision needs another level of consideration or the owner needs a clearer understanding of what can safely be drawn from the business. Small improvements made at the decision point can eventually produce substantial improvements in the numbers without the business having to reinvent itself every six months.

There is also a temptation to believe that increasingly sophisticated accounting software somehow solves the problem for us. Modern systems can produce dashboards, graphs, ratios, alerts and reports at speeds that would have seemed extraordinary when I began in the profession, and those developments can be enormously useful. What they cannot do is turn a poor commercial decision into a good one merely by displaying its consequences more attractively. Artificial intelligence may identify the pattern faster, software may warn us earlier and a dashboard may turn red at precisely the right moment, but eventually somebody still has to understand what decision produced the warning and decide whether that decision should be repeated.

Ideally, that understanding occurs before the dashboard has any reason to turn red. The greater opportunity lies not merely in improving our ability to diagnose the problem after it appears, but in becoming more conscious of the decisions that are quietly manufacturing tomorrow’s results. Better information should help us move the point of awareness further forward, not simply make the post-mortem more colourful. Technology can strengthen judgement, but it cannot permanently substitute for it.

That thought sits comfortably alongside What the Accountant Saw, because so much of accounting is really about behaviour disguised as arithmetic. The numbers may tell us that margins are declining, debtors are growing or working capital is tightening, but behind those figures sit conversations, compromises, habits and choices. The accountant may see the evidence after the event, while the owner lived through the decisions that produced it, sometimes without recognising that the apparently minor decisions were accumulating. Bringing those two perspectives together is often where genuine understanding begins.

It also brushes against the territory of 20 Days Too Late, where timing repeatedly determines how many options remain available. Advice sought after the transaction, the expenditure, the contract or the end of the financial year may still be useful, but the range of available choices is usually wider before the event than after it. By the time a problem becomes sufficiently visible in the accounts to demand attention, some of the easiest opportunities to prevent it may already have disappeared. That does not mean the figures are too late to be useful; it means they should teach us where to look earlier next time.

Perhaps that is the deeper responsibility hiding beneath this discussion. If the accounts repeatedly report an outcome we do not like, at some point it becomes worth asking whether we are trying to change the number without changing the behaviour that creates it. Prices may be reviewed every year but still discounted whenever a customer pushes back, debtors may be discussed at every meeting while nobody actually makes the uncomfortable telephone call, and cash-flow forecasts may be prepared beautifully while spending decisions continue to be made without looking at them. In each case the business technically has the information, but information without a change at the decision point may simply allow us to describe the problem more accurately.

Those are not accounting questions in the narrow sense, although accounting may reveal them. They are questions about discipline, standards and the willingness to connect today’s actions with tomorrow’s consequences. There is no shame in discovering that a decision did not work, because business would be remarkably easy if every decision came with its eventual result attached in advance. The stronger response is to understand what the result has taught us and decide whether something at the decision point should change.

After more than forty years around businesses, I have become increasingly wary of treating the accounts as though they are some mysterious judgement handed down from above. They are usually much more ordinary than that and, in some respects, much more useful because they are a record of thousands of commercial decisions gradually gathering together until someone puts dollar signs beside them. Some of those decisions will have been deliberate, others almost unconscious, while a few may simply represent matters nobody stopped long enough to question. Once we see the figures that way, they stop being merely something to react to and become evidence of the way the business is actually being run.

The Banks Consultancy philosophy of speaking in the client’s language matters particularly here because numbers should never be allowed to hide behind accounting terminology. If the gross margin has deteriorated, the conversation needs eventually to reach what was bought, what was sold, what was charged and what changed. If cash is disappearing, the conversation needs to reach who was paid, who has not paid us, what was purchased and what commitments are coming next. Translating the accounts into those ordinary decisions gives the owner a far better opportunity to recognise which parts of the result remain within their control.

A genuine “silent” partner might therefore spend less time announcing what the owner should do and more time exploring where the number began. What changed six months ago, what did we start doing differently, which assumption did we make, what did we stop checking and which uncomfortable conversation did we postpone? The answers may confirm that external circumstances genuinely changed the result, or they may reveal that something inside the business deserves attention. Either answer is useful because the purpose is not to allocate blame but to improve understanding.

Perhaps the next time a number surprises us, the first question need not be, “How do we fix this number?” It may be more useful to ask which decisions created it, whether those decisions were reasonable at the time and whether we are still making them today. From there another question naturally follows: what numbers are the decisions we are making today likely to create six months from now? Those questions do not guarantee the answer we want, but they give us a better chance of understanding the relationship between what we do and what eventually appears on the page.

The accounts will eventually answer that question whether we ask it or not. The advantage comes from asking while there is still time to influence the answer, rather than waiting until the figures arrive and wondering where they came from. The decision usually comes before the number, and perhaps one of the quiet strengths of running a better business is learning to recognise the number while it is still only a decision.