Your Books Should Answer Better Questions

I once visited a sugarcane factory that had been converted into a museum. While much of the museum concerned the people, production methods, and historical events surrounding the industry, I found myself particularly interested in how the business was administered.

I have always been fascinated by how entrepreneurs confront challenges and improve their operations. Some improvements emerge through trial and error. Others are intentional, arising from the ability to recognize a problem before its consequences become unavoidable.

One museum display contained an excerpt from an article written more than a century ago:

I fear that the bookkeeping on the major part of our sugar estates is very neglected and I do not think I'm going too far in saying that it is high time to modify it and institute where it does not already exist a bookkeeping worth its name... It is not the fault of accountants if they keep their books in a simple manner, I would say, and if they cannot give at the end of an exercise the most important information such as the cost of taking a ton of canes to the factory, or else the expense for carrying a ton of canes over a mile... It is not the job of accountants, but that of the owners and administrators themselves, to put an end to this defective system, which cannot give satisfaction today...

— Frederick North-Coombes, Agricultural Review, 1922

What struck me was not the complaint about bookkeeping. It was the assignment of responsibility.

The owner, not the accountant, was responsible for determining what information the business needed.

The accountants could record transactions accurately and maintain the books as instructed. But if those records could not answer important questions about the cost of production or transportation, the system was inadequate for management's purposes.

The responsibility for correcting that inadequacy belonged to the owners and administrators.

A century later, the same problem persists. Businesses can produce financial statements, reconcile their accounts, and report profits while remaining unable to answer questions essential to their future.

The Questions Should Follow the Objective

Consider an entrepreneur who intends to retire in five years.

The business is profitable, has an established reputation, and generates consistent revenue. Selling the company appears to be a reasonable option.

But suppose the owner discovers that a substantial portion of new business comes from personal relationships and referrals that depend directly on the owner's continued involvement.

This creates a problem that may not be apparent in the financial statements. A potential buyer could reasonably discount the company's value because of the risk that those relationships, and the revenue they produce, will disappear when the owner leaves.

The problem is operational, but its consequences are financial.

Recognizing this risk five years before retirement gives the owner an opportunity to address it. Management could begin collecting more detailed information about referral sources, monitoring concentration, and measuring whether new marketing and relationship-building efforts are reducing dependence on the owner.

The business could also develop employees who assume responsibility for maintaining those relationships.

What began as a retirement objective has now determined what information the company needs to collect, what processes it needs to improve, and what management should measure.

I once worked with a client facing a similar challenge. Ultimately, the owner decided not to sell the company but to retain ownership into retirement.

Doing so required reorganizing operations so that management responsibilities and referral relationships could be delegated to employees. It also required developing systems to monitor quality standards, the health of referral sources, and the flow of new business.

The owner needed enough reliable information to supervise the business from a distance without remaining personally involved in every decision.

The objective had changed from preparing the company for sale to preparing it for continued ownership without daily involvement. Yet many of the same operational improvements supported both possibilities.

That is one of the benefits of building a business around useful information: it can preserve choices that might otherwise disappear.

Understanding What the Numbers Represent

One of my earliest jobs was with a hospice company. The business generated considerable amounts of information, and part of my responsibility was to organize it into something management could understand.

I remember building spreadsheets that brought together information from different parts of the operation. One day, while studying the figures, I noticed the numbers increasing and decreasing. Suddenly, the significance of those movements struck me.

These were not merely numbers in a spreadsheet.

Behind them were fathers and mothers, sons and daughters, grandparents and spouses. Increases reflected people approaching the end of their lives and entering hospice care. Decreases often reflected people who had died.

I had a booklet nearby that staff used to help prepare patients and families for the end of life. It discussed matters such as asking for forgiveness, giving permission, and preparing for the time when someone could no longer make decisions independently.

Reading it gave the numbers a significance that no spreadsheet could communicate on its own.

I began to appreciate something that has remained with me throughout my career: numbers are representations of the world around us. Their usefulness depends on understanding what they represent.

A change in a financial or operational measure may indicate a staffing problem, a shift in demand, a change in service quality, or an emerging risk. But the number alone rarely explains its meaning.

Management must understand the underlying operation well enough to ask why the change occurred and what should be done about it.

In a hospice, that understanding carries a particularly human significance. But the principle applies to every business.

A manufacturer needs to understand what drives production costs. A service company needs to understand the relationship between staffing, capacity, and demand. A retailer needs to understand what causes inventory to accumulate or disappear. An owner preparing for retirement needs to understand which parts of the business still depend on personal involvement.

The information required will differ because the questions differ.

Building Operations That Can Answer Questions

Owners have many objectives. Some want to grow or expand into new lines of business. Others want to sell, retire, reduce their involvement, or simply enjoy greater confidence that the company can withstand an unexpected disruption.

Those objectives should influence how the business is organized and what information its systems produce.

If management needs to know whether the company is overstaffed, it must establish useful measures of workload, capacity, and productivity. If the concern is supply shortages, it must understand consumption patterns, lead times, and purchasing requirements. If the objective is to reduce dependence on a single customer or referral source, the business must collect information capable of revealing that concentration.

These systems need not be complicated. Sometimes a carefully designed spreadsheet and a consistent reporting process are sufficient.

What matters is that the information answers a meaningful question and allows management to act.

Good bookkeeping can tell an owner how much money came in and how much went out. But effective management often requires a deeper understanding: What does it actually take to deliver the product or service? Which activities create value? Where is the business vulnerable? What is changing, and why?

The sugarcane administrator understood this in 1922. Knowing the total cost of operating an estate was not enough. Owners needed to understand the cost of bringing a ton of cane to the factory or transporting it a mile. Those details could reveal opportunities that aggregate figures concealed.

The same principle applies today.

A useful information system does more than explain what happened. It helps management recognize what is happening and anticipate what may happen next.

It can provide early signals that staffing is becoming inadequate, costs are rising, customers are becoming concentrated, or the business is growing dependent on processes that cannot be sustained.

More importantly, it can help owners make decisions while they still have the opportunity to choose among alternatives.

The responsibility for creating such a system does not rest solely with the bookkeeper, accountant, or software provider. Those professionals and tools can help build and maintain it, but the questions must ultimately come from the people responsible for directing the business.

Nearly a century after that observation appeared in an agricultural review, the challenge remains much the same.

Owners must decide what they need to know about their businesses, then build operations capable of providing the answers.