It’s Hard to Spot Trends in a Single Data Point

The results were pretty obvious once you got beyond the sports memorabilia lining the other three walls. They were arrayed in multiple sheets of graph paper, all along the far wall: five years’ worth of unit sales, updated in #2 pencil each week, in a line graph overlaid with a bar graph showing weekly revenues.

I could look back at the week when the Boston Globe had done a special promotion, or when the Boston Herald had been on strike, when the Boston Post folded, and when the Boston Record had raised its price. (Yes, kids, Boston had four morning newspapers, and it wasn’t that long ago.) All of that was hanging on my teen-age bedroom wall to represent the last half of my career as a home-delivery paperboy (in those days, we didn’t learn about graphs until junior high school, four years after I delivered my first newspaper).

What was not displayed, tucked away in a desk drawer, was another graph that tracked the steady increase in my account balance at the Melrose (MA) Savings Bank, with the goal clearly marked – to save enough by the end of high school to pay for the first year of college. Somewhere along the way, early-on, I apparently had learned that while you might go public about revenue, you seldom divulged income, and you never mentioned assets. We’re talking Yankee values here (mindful that New England Yankees long preceded those imposters from New York).

But I also learned about trends: my charts showed that sales dipped every summer when people went on vacation. The biggest revenues came in December (Christmas tips!). The Globe’s sales promotions (“Try us free for a month!”) weighed down my bag with extra papers, but never had a lasting effect. And when the Post went out of business, the Globe picked up most of their columnists and thereby most of their readership, so my revenues stayed the same.

In very similar fashion, my client Helen Venero, President of VTI Corporation in Hialeah, FL, noted during my visit there last week that even though 2007 revenues were ahead of 2006 for the first nine months, a big push will be required in the fourth quarter in order to finish ahead for the year. Last year’s final three months were the best ever as the Company accelerated production to clear its order backlog by New Year’s. She noted that there’s a healthy seasonal backlog again and that the staffing is in place to ship it all this year without repeating last year’s overtime push.

For his part, Dan Deneault, President of Purity Services , a long-time client in New Bedford, MA, maintains his bar charts on Excel these days. But the basic data entries of throughput per production hour are annotated each week with his brief comments about factors impacting production – new equipment brought on-line, weather delays, management initiatives, vendor supply issues, machinery down-time, etc. Thus, as his productivity has steadily increased during the past several years, he can readily spot and account for the anomalies and the transition points.

Mary Weiser, the long-time Controller of Vanguard Sailboat Company in Portsmouth, RI, excels in assessing historical trends in both revenues and expenses. As part of the management team’s monthly operational review, Mary and her staff compare the expense in each line item with that of prior year (and the budget) for both the month and year-to-date, and they account for the major differences. By maintaining a file of her notes for each meeting, Mary can readily access what happened a year (or two, or three) ago to identify trends leading to the results for the current month.

All of this seems like simple stuff, and it is. What’s amazing is how few smaller companies make the commitment to maintain and use historical records to provide perspective on current operations. In part this is due to high management turnover: often the owner/president is the only member of the management team with much institutional memory. But in large part it results from a failure to document what has happened – an issue which applies to everything from office procedures and software code-writing to customer relations and employee performance reviews.

Six quick-and-easy procedures can ensure that you have the financial information you need to provide a context for decision-making:

  1. Report your financial results in a consistent format. Avoid making frequent, minor changes to the chart of accounts.
  1. Make major account formatting changes at year-end, and then recast the previous year in the new format to provide a detailed basis for comparison going forward.
  1. Array your annual results side-by-side – income statement, balance sheet, and cash flow statement. Using an Excel sheet and your year-end tax return or accounting review, it’s a simple data-entry exercise. Do you see trends that you weren’t aware of? Can you account for year-to-year anomalies?
  1. Make sure that your accounting staff is maintaining the monthly results on a spreadsheet. Ask them to insert cellular comments for each line item that is inconsistent with recent months, or the prior year, or the budget.
  1. Review this spreadsheet, line by line and comment by comment, in the process of putting together your budget for 2008, and…
  1. Resolve to hold your people accountable for the differences.

Once I started charting the financial results of my paper route business, the handwriting was definitely on the wall – peddling the Globe, Herald, Post, and Record was not alone going to pay my way through college. Consequently, the Brad Howe Enterprises chart of accounts included more revenue categories through high school, but that graph on the bedroom wall always pointed toward the goal. The alarm clock may have woken me up at 5:30 a.m., but those trend lines are what got me out of bed each morning.

Alligator Bites

“In most organizations, control is exercised via standard operating procedures, tight supervision, detailed role definitions, a minimum of self-directed time, and frequent reviews by higher-ups. These mechanisms certainly bring people to heel, but they also put a short leash on initiative, creativity, and passion. Luckily there are other ways of keeping things in check – other hows, if you will.

“For example, while the in-store teams at Whole Foods [cited as a company ‘where radical freedom is a central part of everyday life’] have a significant degree of discretion over staffing, pricing, and product selection, they are also held accountable for … monthly profitability targets, and when they meet those goals, team members receive a bonus in their next paycheck. Since the rewards are team-based, associates have little tolerance for colleagues who don’t pull their weight. … Turns out you don’t need a lot of top-down discipline when four conditions are met:

  1. First-line employees are responsible for results.
  1. Team members have access to real-time performance data.
  1. They have decision authority over the key variables that influence performance outcomes.
  1. There’s a tight coupling between results, compensation, and recognition.”

– Excerpted from The Future of Management by Gary Hamel Harvard Business School Press, October 2007 – As quoted in Fortune magazine, October 1, 2007

Draining the Swamp

Selected Economic Data:

10/5/07 10/5/06

Dow Jones Industrial Average 14,066 11,866

NASDAQ Average 2,780 2,306

Prime Rate (%) 7.75 8.25

30-yr. fixed mortgage rate (%) 6.16 6.30

US $: Euro Exchange $1.41:1 $1.27:1

US $: Canadian $ Exchange $1.02:1 $.89:1

Consumer Price Index (all) 207.9 203.7