We recently held a webinar titled “Artificial Intelligence for Financial Executives” where you can find a recording and a poll showing very high alignment with the role CFOs/Financial Executives need to play. In his March 2023 GatesNotes post, Bill Gates said, “The development of AI is as fundamental as the creation of the microprocessor, the […]Continue reading
Does the Calendar Rule Your Business?
As a former (now “recovering”) CFO, I have long been curious about why most businesses seem to only measure their financial performance in months and quarters (and years too).
I have also noticed that some CEOs have been willing to accept higher costs and/or lower margins in order to pull future revenues forward into the current month or quarter to “hit their numbers.” (I certainly appreciate and support the desire to accelerate or defer profits between tax years, but I am not referring to that type of activity.)
Let’s dig deeper into the two issues I have raised here.
- Measuring by months and/or quarters only:
Every accounting system is set up in the 12 monthly P&L periods per year. Yet the BUSINESS may have seasonality or other dynamics that are not tied to the monthly calendar. A friend of mine was CFO for an online flower and gift company. They had several P&L periods per year:
- Valentines’ Day (which was often a several-day period)
- Easter (sometimes in March, sometimes in April)
- Mothers’ Day
- Christmas season
- All others (non-holiday periods)
They structured their internal financials to measure these seasons, which are not tied to calendar months but pre-determined calendar days/periods that may or may not differ from one year to another. I loved this. They could also “hit a button” that would automatically convert the P&Ls into traditional months & quarters.
Does YOUR business have some clear “seasons” within the year that could be captured differently to better manage the business than being stuck with calendar months only?
- The profit dilution that may come with pulling revenues forward to “hit your numbers”
This is a very common issue. Lowering prices/discounting, offering sales incentives, working overtime, incurring RUSH shipping costs, (etc. etc.) are often involved in trying to accelerate end-of-month or quarter revenues to “hit our numbers.” While it is easy to appreciate the emotions behind this, it often reflects the absence of communicating the revenue backlog at the end of a month or quarter. The near-future revenues IS a relevant financial data point. Investors, bankers, etc. all understand sales backlogs, but few companies emphasize or communicate this important area of the business.
So, the questions here for CEOs and their teams are: Do we lose profits because we are too focused on WHEN sales/profits are reported in our financial statements? Do we do a good job of measuring and communicating the trends in our sales backlog to those internal and external readers of our financial results?
Hopefully, these thought-provoking points will resonate with CEOs even though their CFOs and accounting folks may show some initial resistance to thinking outside the CALENDAR BOX!