As George Akerlof and Robert Shiller discuss in their widely acclaimed book, Animal Spirits (How Human Psychology Drives The Economy, and Why It Matters for Global Capitalism),

“The human mind is built to think in terms of narratives, of sequences of events with an internal logic and dynamic that appear as a unified whole.  In turn, much of human motivation comes from living through a story of our lives, a story we tell to ourselves and that creates a framework for motivation.  Life could be just ‘one damn thing after another’ if it weren’t for such stories…. Great leaders are first and foremost creators of stories.”

Think about the stories that define your life.  How do these stories influence your perspective?  How do they influence how you see yourself?  What are the stories that resonate most strongly in your life?  What stories do you choose to relate to other people?  There’s a growing body of knowledge, that aligns with the passage above, saying these stories are fundamental to the formation of our identities.  This is a powerful thought.

Yet, traditionally in accounting and finance, stories are an afterthought.  We are taught to focus on the numbers.  We create the balance sheet, income statement, and cash flow statement in accordance with GAAP, leaving storytelling to the sales and marketing departments.  My experience has been that it’s very difficult to generate engagement through the use of the financial reports, and in retrospect, I think it’s for this reason.

There’s a reason why people say the Notes To The Financial Statements will tell you “where the bodies are buried”.  The reason is that only in The Notes do we find stories.

From a regulatory perspective, for external reporting we’re fairly hog-tied as to what we can do.  GAAP is king.  These constraints are institutionalized and provide a structural grounding for capital markets that is required for a host of reasons.

Internal reports, on the other hand, present a tremendous opportunity to begin using stories to provide context and colour to business results.  This is the area of accounting and finance where we can really affect some change NOW by bringing life to the numbers.

In the following clip, Ira Glass (son of an accountant and award winning host of This American Life on Chicago Public Radio) describes using anecdotes to convey ideas and says,

“the power of the anecdote is so great, no matter how boring the material is, if it’s in a story form where there’s an anecdote happening,  it has a momentum in and of itself… like being on a train that has a destination”

(hat tip to Presentation Zen blog for a good post on this same clip)

Ira Glass summarizes the process of telling a story as:

1. Start with an action

2. Raise a question from the beginning (the bait)

3. Answer the question

4. Repeat

5. Moment of Reflection (the “why”)

Enjoy!

Related posts:

1. Running the gauntlet of Year End Business Reporting
2. Accounting for I.T. in the Finance Department
3. Improving Your Month-end Throughput

“Buy the ticket, take the ride” – Hunter S. Thompson

Now, this isn’t a critique of the inevitable conflicts (real and perceived) inherent between these various groups.  Nor is it a post about the differences between Accounting and Marketing.  In order to do that, I am missing one critical piece.  My good friend Dan’s “Top Ten Differences between Accounting and Marketing List“.  Maybe with your help, readers, we can convince him to give it up.  Add your thoughts in the comments section!

NO.  This post is about posing a simple question:

How are your Year End spreadsheets doing?

Year End is upon us!  Everyone knows, thanks to these accounting blogs:

• Look at Last Year’s File
• Accounting Nation
• Accounting WEB
• CPA Trendlines
• re: The Auditors
• Junior Deputy Accountant (warning: Language)
• and Going Concern

Everyone knows that Audit Professionals have been raked over the coals of more stringent regulation and oversight the past few years (for all the good it’s done!).  And, if my experience is at all representative of our collective experience on the industry side, the auditors have been passing all of that regulation onto you!

Preferred method of passing = The Paddle

The paddle will be heading your way again soon enough.  Time to rollover all those Year End files and clean up for prepping 2009’s close.  The rigors of financial reporting compliance are staring us right in the face once again.  Oh, and Merry Christmas by the way.

Of course, I think that if the past 2 year’s have taught us anything, it’s that regulation is ineffective in preventing fraud.  I would like to know where Frank Abagnale jr. stands on this issue.  Abagnale is the character upon which the movie Catch Me If You Can is based and for the past 35 years he’s been helping the FBI, businesses, and government cope with matters of fraudulent activity.  I highly recommend his book, Art of The Steal, for anyone interested in learning more about specific industry-related fraud risk.

Ultimately, prevention is the key; and if that’s true, historical financial reports will never fulfill that role.  I realize that doesn’t mean we shouldn’t try, but my view is that (anecdotally) auditors are getting hung up on details that bear little or no relation to the real risks.  Reason has been traded for checklists.

Be that as it may, you guys are still going to be toiling over this stuff, at their mercy, in the very near future.  At the same time, you will be expected by your management team to provide ACTUAL insight into the ACTUAL operations of your ACTUAL business.

Operations.  This is where the rubber meets the road.  Here is where you can’t “juke the stats“.  Yet, due to the pressures around the financial reports (case in point above), our operations reports are given second billing (if that – after payroll, A/R and collections, admin, etc).  To give you an idea of how much they are marginalized, there isn’t even a Wikipedia entry for Operations Reports!

I don’t see the issue with the auditors changing or going away anytime soon.  For me, there’s no reason to be optimistic or to engender optimism in you regarding that!  This is the system we live with for the moment.

Operations Reporting has to find a way to fit within the time constraints given these other pressures.  Either it fits in by 1) doing less or 2) doing more in less time.  How would you prefer to deal with your Operations Reports?

Do you have questions about the difference between Financial Reports and Operations Reports?  What are your views with respect to how this all fits together?  Let us know in the comments (and don’t worry, no salesperson will visit you).

When you talk about the true viability of the business, what does it really mean?

Closing links:

• Here’s a great segment talking about why we should question Ratings Agencies
• Embedded copy of IDCs Predictions for 2010

Enjoy!

Top 10 IT Predictions for 2010

Related posts:

1. Business Reporting ≠ Dishwasher Job
2. The Roots of Business Reporting Technology
3. The Importance of Stories

“Hard work is a prison sentence only if it does not have meaning”
- Malcolm Gladwell, author of Outliers

“Finding the one or two key numbers that drives success in your business, and bringing them to everyone is very powerful in a business”
– Joe Knight, co-author of Financial Intelligence

The inspiration for this post was a management improvement video (13 minutes) posted on You Tube by http://www.harvardbusiness.org of an interview with Joe Knight, co-author of the book series “Financial Intelligence”, Business Owner, and Harvard Business.org blogger.  The central message of the interview was that everyone in an organization benefits from understanding the numbers by which success is measured within a business.  The trick is finding the right numbers.  Particularly in today’s climate hearing about transparency is nothing new, but what doesn’t get as much play is this idea of narrowing the focus on measures of performance.

With respect to the numbers: Thanks to technology, we now have ALL the numbers available ALL the time. Reports have become super-robust because they can.  Although there’s an argument for providing surplus information and letting the end user choose which parts to digest, there is also a great danger.  Knight argues that providing less information to end users can actually produce better business intelligence.  The process of asking the questions and finding the underlying systems within an operating group can enable a more focused, effective approach to providing reports. First, understand the work flow and underlying system of work for operations groups; then, develop measures around them.  It’s easy to say, but when was the last time these conversations have taken place in your business?

“Business is like a game, and if you don’t understand the finances, you’re basically playing a game where you don’t know score”
- Joe Knight

According to Knight the emphasis should be, and this is where the interview really resonates with me, on providing a small number of operational metrics in a simple way and providing them to everyone.  He rightly points out that the people receiving this information probably don’t want to be accountants, and have little or no interest in double-entry accounting “no matter how exciting it may appear to be”.  For Accounting and Finance guys like us, it then becomes an exercise of translating Business Intelligence into Practical Intelligence in the reports we create to achieve an optimal value.  It would be like one of us attending an advanced physics lesson.  We would get way more out of it if someone simply dropped an apple on our heads.  Sometimes less is more.

The implied point here is that results are distributed throughout the business, not just to top managers.  Doing so, creates what Knight dubs “psychic ownership” so that even though employees may not BE owners of the business they start to ACT like owners.  This occurs when an employee can make the connection between his/her own actions and the financial result.  That is why the choice of what gets communicated is so crucial.  Finding one or two key drivers to the business that correlate with the financial results will accomplish this task.  Malcolm Gladwell, (author, and columnist for The New Yorker), makes a similar point, in his best selling book Outliers, about the importance of being able to see the link between effort and reward.  Gladwell contends there are 3 important qualities that define “meaningful work”, 1) autonomy, 2) complexity, and 3) a connection between effort and reward.  FYI, Outliers provides some interesting views through a number of entertaining anecdotes ranging from Bill Gates’ early days to The Beatles.

The book is about elements that contribute to the conditions for success.  The effort-reward piece is illustrated using The Garment Industry of 1890s NYC.  This turns out to be the roots of several top litigation firms in New York.  The moral of the story is that being able to see the connection between effort and reward creates a positive feedback loop.  Hard work becomes meaningful work.  I highly recommend it.

Ultimately, the “score” of the business is represented by the Financial Reports, right?  As accounting professionals, we know the complex process whereby these reports are created. As well, there are the intricacies and nuances associated with the interpretation of these reports.  We have the proper training to derive meaning from them.

Based on my experience, most of us are keen to share any and all of this information (confidentiality permitting) with colleagues.  In the video, Knight argues that we may be guilty of over-sharing; providing far too many KPIs.  If “KPI” is being used to describe every line item in the P&L, you’ve got a problem. The Law of Unintended Consequences kicks in, inadvertently confusing people.

There have been several studies recently on the behaviour of shoppers that would appear to bolster this line of thinking.  Shoppers who are given an abundant choice of product buy less than those given just one or two choices.  If we view the recipients of our internal management reports as “shoppers” and the reports we create as our “product” in conjunction with this behavioural insight that Knight suggests, we can create more effective reports.  At which point, as Gladwell illustrates, we will be able to show the link between effort and reward.

The result is the Meaningful Scorecard; communicating the numbers to people in “a way that gets at what’s important” and “how it affects them”.

So, the question is, what actions and activities correlate with success in your business?

Related posts:

1. RELEVANCE
2. Running the gauntlet of Year End Business Reporting
3. Improving Your Month-end Throughput