Get Smart: Stop Doing Dumb Things
I’ve been speaking to finance managers and executives around the country fairly often this year. Many of these recent engagements have taken place at dinners, where the wine and the discussions tend to flow freely as the evening progresses.
One of the most common (and most candid) comments I continue to hear relates to the challenge of taking on additional work – more priorities – without adding either money or manpower due to tough economic times. Most finance managers I speak with want to support the changes they are being asked to make, but they are overwhelmed by yet another “A” priority. What so many finance managers are really looking for is a way to carve out time and space to take on this new and crucial work without increasing costs. In our late-night discussions, we jokingly commented that we could take on more if we could find ways to stop doing much of the dumb stuff we often feel compelled to do. These discussions quickly grew into a running list of “Dumb Stuff We Should Stop Doing!”
I’m working on writing about this list in a more formal and eloquent way, but in the meantime, I want to share what I’ve collected so I can get your feedback as to which are the dumbest. I also want to hear your ideas on what else should be added to the list. (If you have anything to share, please email it to me under the heading “Dumb Stuff” or post it as a comment; also feel free to disagree.)
I’m hoping this area of inquiry ultimately helps us all get smarter in how we in manage finance and operate on a daily basis.
For example, financial variance explanations feature prominently on the Dumb Stuff List.
We should stop doing financial variance explanations. Recent research published in Business Finance magazine notes that over the course of the year, many traditional budgets become obsolete. This grows to the point where over half are not valid by the middle of the year. As a result, the monthly financial variance description explaining why actual does not match budget becomes a great source of irritation (and little useful information).
By April or May, those of us who adhere to traditional planning and control processes usually are explaining that actual does not match budget. The explanation notes that the budget’s wrong “because we screwed up the assumptions last summer.” The next month, you likely get the same explanation. After three or four times, someone starts to ask why finance can’t make accurate assumptions about the future 6 to 18 months in advance. Why do we keep doing it year after year and month after month when we know its dumb stuff?
What do we accomplish by flogging ourselves once a month for the rest of the year by repeating that we screwed up the assumptions we made last summer?
Not much, if anything at all. But imagine what we might accomplish if we channeled all of that time and energy into something that actually added value for the company. The screwed-up budget is not going to magically correct itself. So, stop doing routine variance analysis; it’s Dumb Stuff.
What else should be on this Dumb Stuff We Should Stop Doing list? I welcome and value your insights; email me. ###
July 7th, 2009 at 5:51 pm
Years ago as Cost Manager for a $1B+ Company, a small part of my job was to assure good forecasts and (when needed) good variance analysis of Costs, Sales, Orders, Profit by element & by month. Variance Analysis was only required when variance exceeded a reasonable predetermined threshold. Another part of my job was to MAKE those forecasts became actual results. Later, I performed a similar function as Rates Manager. While forecasts & variance analysis took a small amount of time, the payoff was extremely large.
Persons complaining about forecasting & performing variance analysis are in with the current mass thinking; but are also missing much financial value and missing the point. I drove many many millions of additional profit into the company records which would not have been otherwise possible. With respect, I offer for consideration that the complainers: (1) learn how to MAKE forecasts happen, not just predict them, (2) learn how to set up reasonable & meaningful thresholds, and (3) learn how to perform meaningful variance analysis which lead to understanding “WHY” the forecast was missed. Perhaps these folks would profit by reading the book “Lean Thinking” and then using that revelation to start understanding basic concepts behind process improvements, lean, and six-sigma initiatives. Let’s get smart! - - - Earl Brooks
July 9th, 2009 at 11:09 pm
Earl, I want to thank you for your comment. I always enjoy hearing different perspectives. I would like a little more detail on what you mean by “learn how to MAKE forecasts happen, not just predict them.” I have seen this advice follwed into soe very serious consequences. Chris Mckittrick’s July 7th column (Under the Radar) discusses the fraud at Health South. Is that an exhibition of “how to MAKE forecasts happen?”
In a volitile world the only ways the MAKE forecasts happen is to either always give extremely conservative forecasts or be willing to manipulate the results. HealthSouth and Enron got into trouble with the latter. But I think the former is similarly determental in that (in the words of Jack Welch) it “leads to sand bagging and mediocrity.”
You may have found ways to predict. If so please share them. Please help me understand how can any organization can consistently predict the future price of a barrel of oil? At the beginninng of 2008 it was $100 per barrel climbing to $143 by June 2008 and then dropping to under $40 in November. 2009 seems to be following a similar pattern but at very different levels.What is your forecast? and how can you MAKE it happen?
I do strongly agree with your recommendation that finance professionals can benefit from reading Lean Thinking. I believe any of our efforts should start with understanding what customers need. I look forward to continuing the dialogue.
July 12th, 2009 at 1:24 pm
I completely disagree with your conclusion. Yes, analyzing the variance of results from forecasted point estimates is an exercise in futility. But, the answer is not to “give up” on the capital-budgeting effort. Rather, what is needed is for financial executives to “train-up” their staffs on how to perform stochasitically-enabled forecasting and budgeting. Thereafter, the “variance” meeting would only be to discuss those results that are “outside” the stochastic budget variance (say at the 10% and 90% percentiles). To advocatge quitting on capital-budgeting processes is insanity.
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