Credit Matters Blog

The numbers don’t lie, they just don’t always tell the truth!

Kim Radok 18 September 2019

The problem with numbers is highlighted by Lindsay Maxstead, the chairman of Westpac at Australia’s Banking Royal Commission.

“As a board, we were going through thinking we had customer complaints under control.” He said, “They were lowering year after year, we were really happy with the attention that was being paid to complaints.

“But we missed a pretty basic point – we missed the 1 per cent of complaints that are really serious. And guess what? They are the ones you saw in the Hayne royal commission.”

To the uninitiated or those with vested interests, without suitable backup or understanding, numbers do not lie. They just don’t always tell the truth. We see this situation when balance sheets are reviewed after a business becomes insolvent. Balance sheets and other financial statements are not always prepared with the best intentions. Many are prepared to produce a result designed to suit vested interests.

When this situation is revealed, those who signed off the reports confirm they either did not understand the figures, or want to admit they did not understand the figures. Barings Bank is the perfect example of directors not understanding the reports they were reviewing and signing off as valid. There have been numerous other examples in the commercial environment and we will see many more in the future as the global downturn continues.

The only true figure any business person can ever rely on in business is the bank balance. You cannot manufacture that figure; it is fact.

We also see this lack of understanding when management looks at the outstanding figures in the Debtors Ledger. Unless the figures in the last column of the Ledger are outrageously high, management rarely blinks, or takes action to identify the nature of the dollars exposed.

Over the years I have found this lack of interest in the outstanding dollars in this final column of the Debtors Ledger perplexing. The reality is; the figures in this column represents money which should be in your business’s bank, which instead, is still in your customers’ bank accounts.

Alternatively, the exposed dollar values could represent your business mistakes relating to unpaid invoices. What these figures do not show; is the cost of repairing these business mistakes and fixing the invoices, many of which may need to be readjusted or cancelled.

Many people might say any dollar figures in this last column may not be a material factor for the company based on the percentage of dollars versus the total of the Ledger. However, again, what does this “material” figure really mean? In a small business for instance, 10 per cent of $1000.00 is $100 dollars and this may be an issue for that small business.

In a larger business, a Debtors Ledger with $1 million dollars may have a dollar figure of $100,000 in the final column. For a business to say $100,000 is not a material figure seems to be an irresponsible attitude by management. After all, perhaps $50-60,000 is cash which is not available for the company, with the balance requiring unprofitable work to resolve.

Furthermore, many of the problems requiring work could be of a reoccurring nature and the costs to repair these same mistakes will continue to impact negatively into the future.

The other area of concern is if there are no outstanding dollars shown in the final columns of the Ledger. This situation is caused by inexperienced, lazy or undisciplined accounts employees who do not allocate funds received from clients, as directed by the clients. Consequently, the funds are just allocated against the oldest invoices. Whilst the Debtors Ledger looks good to management, in fact, this situation is a disaster waiting to happen.

If you have ever been involved in reconciling poorly managed customer accounts and seen the unbelievable costs incurred to correct the situation, you will know exactly what I mean. In my experience, the cost to reconcile customer accounts to bring them into order is rarely less than many thousands of dollars.

In business today, “not knowing” is no longer an excuse for incompetence. Today, business owners, directors and managers need to really know what the figures mean for the survival and success of the business. Nowhere is this “knowing” more important than understanding the figures in the Debtors Ledger.