Dec. 6, 2004 – Chainsaw Accounting and Balance Sheets
December 6, 2004
Filed under Features
The room was filled with the owners of 25 dealerships from around the country. They were attending a Lightspeed Dealer Principal class in Salt Lake City where I was presenting ways to improve performance and make dealerships more profitable. The subject of financial statements came up, and as part of the introduction to the subject, I asked how many of the owners in the room had confidence in their P&L and their Balance Sheet.
Only one person raised his hand.
I asked the question again, explaining that sure, there are always a few questions about some items on these two reports, but how many in the room use them to make management decisions?
Again, only one hand.
And then they blew. Negative inventories, Cost of Sales greater than Sales, Bank Balances that were miles away from what the bank said, Balance Sheets that don’t balance, Margins that are far off the mark, and all of this delivered months after the actual operating month, too late to do anything about anything.
All in all, a pretty dismal report card for some office folks back home who show up every day, run AP, get the UPS guy on his way, pay our taxes, get the bikes licensed, and generally take care of all that “office stuff.”
But what about the financial statements? Why is it so hard to do this?
As this group of typical owners began to open up, I saw the same problem emerge that I have seen time and time again in the field. The current bookkeeper inherited a mess, and has just never had time to straighten it out. She is so busy just keeping up, that she doesn’t have time to catch up.
So the errors persist, they never go away, and we are left with problems on top of problems on top of problems. And it would take so much time to figure it all out and make the corrections, that they just don’t do it, but rather only try to keep up. It looks impossible to ever get it right.
Or so it seems.
There is an answer. Just for fun, I started calling it Chainsaw Accounting, but the analogy is actually quite close, and the results can be just as refreshing as a newly cut stand of timber.
Here’s how it works: Forget the mistakes of the past. You will never have time to go back to 1997 and figure out what those accounting entries meant. Forget last year, forget last month, forget last week! The truth that you are trying to reestablish is right under your nose. You just didn’t know how to grab it. But it is there.
The Balance Sheet is a snapshot of what you HAVE. The P&L is a running total of what you DO.
I HAVE receivables, inventories, cash in the bank, and bills to pay. They show up on my Balance Sheet.
I DO trade my inventory for my customer’s money (we call that “a sale”), I see my inventory walk out the door and I call that “Cost of Sales.” My people show up to work and I pay them, I use electricity, water, and the telephone and I call these expenses. All of these things show up on my Statement of Profit and/or Loss. Or at least, they should.
Every action taken and recorded on my P&L has an effect on my Balance Sheet. My inventory leaves, my money goes away, or I get a receivable as Method of Payment rather than cash. It is tough to watch and record all actions. You have to be there! But you can touch, feel, kick, and count what remains: The Asset, or the Liability.
And this leads us to the solution for this mess. (Drum roll here…) We just count what we physically HAVE here in front of us today, and force the Balance Sheet into agreement with these true amounts. When the last entry is made to the Balance Sheet and all is correct there, any unresolved difference is moved to the P&L as either income or expense. Voilà! Truth and accuracy at last.
The proper term for this action is Reconciliation of the Balance Sheet, and a good accounting shop will do it every month! It is actually done in two steps. The first is to reconcile the sub ledgers (Accounts Receivable Detail, Accounts Payable Detail, Inventories, Amortization Schedules, Cash Accounts etc.) to the truth by physical count or verification. And second, force the balance sheet to agree with the verified sub ledger balances. As you adjust balance sheet accounts, the offset can be run to a logical offset (Inventory low? Charge the difference to Cost of Sales.) or, send the difference to a suspense account that can be moved to either expense or income at the end of the whole process.
Once you have done this, you have the truth in front of you, however painful it may be.
I have done this time and time again in your stores. When it is just impossible to go back and unearth and correct all the sins of the past, you just take a new run at it, count what is really here, and adjust the accounting records to reflect the truth as discovered by actual physical inspection and count. Your Balance Sheet is not Holy Scripture. Only The Truth, as found in The Real World, is Immutable
Hear that two-stroke engine rev’n up? That’s not a hot new racer out in the shop, that’s my accounting chainsaw, getting ready to cut to the core of your accounting mess and reveal the truth. It works. And sometimes it is the only way.
So quit agonizing over the pitiful state of your financials. Quit thinking that you can never correct all the errors from all the years in the past and that you will never be able to use your financials to run your business. Just get out that chainsaw, and get to work. The truth may be a shock, but at least it is The Truth.
Hal Ethington has been associated with the powersports industry for more than 30 years, and he brings to this column his experience as owner, accountant, financial analyst, and computer program developer. For the paast 10 years, he has been a ProQuest classroom instructor.