Misleading Reports

by Adina Luca, May 2, 2016

When you are the owner of a business, even if it is just a small business, how you look at the data and which information you use in your decision making is key to the health of your business. You do collect data, whether you are aware of it or not, and you do use some reports, but which ones? Do they help you or do they mislead you?

To check the quality of your information and your decisions, you need to create a feedback loop around your data: what information you look at, how you interpret what you see, what conclusions you draw, what you do about it, and what happened after you did something based on that information.

Let’s start with what you look at. We usually talk about the positive examples – where you should look if you want to make informed decisions. This time we want to talk about the opposite: examples of reports which were at best unhelpful, if not outright detrimental, but nevertheless we found our clients collected and attempted to use them in decision making.
If you happen collect such information, you will find suggested uses below that could improve their outcome on your decisions.

Total payroll as absolute figure or as percentage of cost – lumping together all staff salaries, including front and back office, is unhelpful. Actually, it can get you into trouble, as it makes it difficult to identify staff performance measures. The only use we can think of for such a report is helping you size up the cash you need at the end of each month for your wages.

The worst use we have found for this report is as a cost monitor – specifically, total payroll as percentage of total cost. The argument was that the industry benchmark dictates that payroll should be within XX% of total costs. That may well be so, but if your total cost is already very high and payroll is under 70% of that, then you might think you are fine… and overlook possible optimisation routes for your staff performance.

IT and insurance as absolute figure or as percentage of cost – your accountants may lump together all costs for IT and insurance for simplicity. But simplicity may work against insights. These days, the two costs can have two completely different uses. IT’s role in delivery is growing and many times a portion of the IT goes straight into Direct Costs. Insurance is used for a variety of purposes and you may need to account for it differently. Lumping the two together will affect your pricing calculation or your decisions to optimise office costs.

Sales and General Expenses as absolute figure or as percentage of cost – this is also known as SGA and their absolute figure or percentage out of cost will tell you nothing. Sales cost is a variable that you really want to (sometimes) increase. Admin is a fixed cost that is usually unavoidable and you want to (always) decrease.

Additionally, there is no such a thing as ‘general expenses’. All expenses in a company have a purpose and are the result of your decisions. Breaking them down by purpose will help you optimise your costs and inform your budgetary allocations.

Number of Days Outstanding over Due Date – we hate this type of reporting for the disastrous impact it could have on your cash-flow. Unfortunately, most accounting software packages include the due date report. This is what happens: by the time your software starts ‘counting’ and highlighting the outstanding invoices, it is too late for your cash-flow. Majority of contracts include a 30 day payment notice and ‘over due date’ is already 30 days late. In the meantime, most of your expenses are paid within 30 days. You are doomed to pay your bills faster than you get your money in. Relying on your ‘days outstanding over due date’ keeps you running after cash.

Number of clients – your number of clients does not tell you anything about the growth or profitability of your business. Sometimes you might want your number of clients to decrease while value per client increases.

Oh, and ignore this number when your competitor brags about it on their website; chances are they are counting clients that have left them years ago.

Average value per invoices – this can be a very misleading figure for your business. You have different type of clients, ranging from major accounts to occasional small value clients. Averaging them will not tell you much about the size of the projects you sell and may even confuse your strategy for growth of current accounts.

Same for ‘average monthly revenue’, especially if you are trying to use it to project your cash-flow. Cash does not come in ‘averages,’ unless you are a subscription-based service.

Number of invoices issued – this must be in our top five useless reports. Unless you issue thousands of invoices a week and you pay for the paper and posting for each invoice or it affects how much you pay your accountants per entry, there is no other use of this information.

Client segmentation by industry – there is not much need to maintain that information in your CRM and unfortunately most CRMs ask you for that data. How much revenue is brought by various industries that your clients are in does not tell you much. Additionally, professional services can be restricted by contract or avoid by own initiative to sell to direct competitors, as they could be in possession of sensitive information.

Allocate Payroll to Direct and Indirect costs and monitor their percentage out of Revenue – if you don’t divide that payroll per function and unit of work to see variability and differences, your productivity will remain a mystery. You need to monitor other indicators within the payroll, usually timesheets / utilisation rate in professional services, or labour costs per unit in production or number of services delivered in service-intensive industries.

Always separate Sales costs from all other costs and monitor their percentage out of Revenue – you always want your sales costs as a separate budget and percentage indicator. It helps you make your sales accountable for their cost and monitor hidden expenses. For example, it can tell you whether you can really afford to fly to _______ (fill in the blanks) to meet prospects this year.

Account for your Insurance costs based on use – a portion of your insurance costs could be a Direct Cost and monitoring it as such highlights the real cost of your service. Think about motor insurance for a company who delivers services ‘on-site’ to clients. The motor insurance is clearly a Direct Cost as the service cannot be performed without it. Simultaneously, the company may be paying insurance for the administrative office, a clear fixed costs part of the Indirect Costs.

Monitor Number of Days Outstanding over Invoice Date – you want to monitor real days outstanding i.e. from the date of issuing the invoice to the date of cashing in. Ignore ‘due date’ when you count the days and establish a target for collection of a high percentage of your revenue under 30 days.

Uses for number of clients – you could use this information to calculate client churn, do something about negative churn and plan your growth. You can establish trends in number of clients against the value that they bring and see whether you tend to upload new clients at a higher or lower value than the ones lost. Another useful outcome of looking at the number of clients is to establish account management effort i.e. scale your customer service staff and sales account allocation.

Uses for average value per invoices – this is a helpful report in conjunction with client segmentation. If you have established a sound and useful segmentation criteria for your clients, calculating the average value per invoices for each segment may give you useful information about segment penetration or profitability.

Uses for client segmentation by industry – you can check it every couple of years, such as when you establish your marketing strategy or when you want to to see whether the market you think you are targeting is the market that actually buys from you. It could also be useful when you have some form of benchmark that can tell you whether you are getting enough ‘share of wallet’ from that industry’s budget for your type of service. Finally, you can use the information as PR and send messages to the market that you are the ‘specialist in X industry.’