My boss made me present financial reports as drawings.
Along time ago when I wore an accountants hat, I used to work for a multinational engineering group that had a lot of operations in Asia. My boss was a Filipino who lived in the US, had been a managing partner of Arthur Anderson and was on the board of an airline. You could say that he was a global finance guy.
On occasion he would request a presentation on an area of our operations. My normal response was to scurry around for a week building spreadsheets of our Profit & Loss and Balance Sheet with some lovely graphs. His response was to ask me to draw where the money came from and where it was going.
Having studied Accounting, not Art, I used to find this approach very confrontational, but after a while I started to understand what he was getting at.
His point was:
- In a multi-jurisdiction environment, issues around accounting policies and taxation can cloud understanding of basic operations.
- The concept of profit in itself is vague (Operational, NPAT, EBIT, EBITDA etc, etc).
- The differences between cash and accrual accounting can hide all manner of sins.
- Policies underly revenue, expenses, liabilities and assets, not necessarily reality.
- Cashflow is the ultimate metric for measuring performance, everything else is secondary.
- And finally, if you can’t draw out where the cash is coming from, and going to, you don’t understand what you are talking about.
I bring all this up because I had a chat with an IP commercialisation guy the other week and asked him how he was going. Fabulous he said. He had done a huge number of deals over the last 4 years and had created some equity positions in some really interesting businesses.
The fact that he thought he was doing a fabulous job, put never mentioned revenue immediately caught my attention, but in a slightly irritated way.
I said “So you think you are successful?”.
So he said “Well it depends how you measure success”.
I said “Well lets say at the end of the day, its all got to hit your bank account as cash, so how much cash have you actually been responsible for putting into your employers bank account”.
He said in a very small voice “Well none actually”.
Now I’m not saying that profits and deal making isn’t important, I’m just saying beware vanity metrics!