As I’ve previously established, I’m a rabid baseball fan and have been for nearly half a century. (Oh, that hurt!) I love the pace of the game, the finesse skills of the athletes, and the strategy involved in pitch selection, positioning, player substitutions, etc. Don’t even get me started about the designated hitter rules.
I’ve always loved reading and analyzing baseball statistics. Each day when I open the newspaper (I’ve already established my age so, yes, I do read a newspaper), I’ll skim the front page to make sure that global annihilation is not imminent and then I’ll peruse the sports page, particularly, the box scores and stats leaders. Baseball is loaded with measurable statistics. At Bats, Runs, Hits, Runs Batted In, Home Runs, Strikeouts, Walks, Earned Runs, Innings Pitched. (In short hand, AB, R, H, RBI, HR, K, BB, ER, IP.) These measurements are then used to create other stats, such as Batting Average, On-Base Percentage, Slugging Percentage, Earned Run Average (ERA), Walks + Hits per Inning Pitched (WHIP), and on and on.
The obsession with statistics in baseball has led to an entire field known as sabermetrics, “the search for objective knowledge about baseball.” It is the quest for the holy grail when comparing players from different eras or different leagues (“Who was better, Willie Mays or Mickey Mantle?”) or to predict the future value of current players (“What is Pablo Sandoval’s future value based on his current production?”) Sabermetricians have even come up with new statistics, such as OPS (On-base + Slugging) and Runs Produced.
My interest in baseball stats comes from the same curiosity that drives me to look at business metrics. Every business has certain measurements or statistics that can be used to measure the performance of the company or individuals within the company. There are also measurements that can help predict the future profitability of the company. The key is to find the right metrics. Sabermetrics for business. It’s not quite the search for the holy grail, but it is critical to find the right mix of drivers.
You see, by identifying the business’ key performance indicators (KPIs), we can address several critical questions, similar to the Mays vs. Mantle question above. How does this period stack up against last period? What trends can we spot in revenue and expenses? How do we compare to the industry as a whole?
While these are interesting questions, KPIs can be even more useful as predictors of future outcomes. Just as baseball owners look at critical stats to see which areas need the most improvement, business owners need to know which KPIs to improve in order to give them a better chance of improving profits and cash flow.
We are fortunate to have several tools that allow us to analyze KPIs across multiple periods against industry averages and to use that analysis to predict and plan for future outcomes. Whether we’re looking to improve cash flow from operations, net profit before taxes, or debt-to-equity ratios, we can analyze a company’s performance to determine where to focus the business owner’s attention and to develop strategies to implement the necessary tactics.
My parents probably thought I was wasting my time reading the sports page so much. Little did they know I was building my professional tool chest.
As accountants, one of the hardest concepts we have to explain is the difference between cash and profit. (There’s also that whole Debit versus Credit thing but don’t get me started. ) I can’t tell you how many discussions have centered around the subject of cash. The discussion with a client can go in one of two directions: 1. “If I made this much money, why don’t I have any cash in the bank? ” or 2. ” I have cash in the bank, so why don’t those financial statements of yours show a profit?”
In the past, I have resorted to drawing on the financial statements, creating elaborate flow charts, building multi-tabbed excel spreadsheets, and one time I tried hand-puppets to make my point. But it’s just not a subject that makes sense to most people. The missing cash can usually be found hiding in the balance sheet as an investment in customer receivables, increased inventory, or additions to fixed assets. The ins and outs of the missing cash can be tracked on the statement of cash flows, but no one ever reads it. (Except fellow accountants and sometimes bankers who are looking for evidence that their loans will be repaid.)
Part of the problem in explaining this concept and many others is the language barrier between us as accountants and the language of normal people like our clients. We tend to think and speak in a linear, numerical fashion while most business owners think visually and speak conceptually. After many years spent wrestling with this issue. we have found a tool that lets us bridge the communication gap. It’s called $COPE It!. It’s a new iteration of similar products we have been using for a couple of years. The beauty of this tool is that you can bring in financial statements, convert them into pictures, and then make changes to your results. So now, rather than telling you that selling more products and services at the same margin (with other factors unchanged) will generate NOT more but LESS cash, I can change one number on the screen and show you the impact on your cash. I can also enter your targeted cash balance, and show you where to focus to achieve it.
After making one simple onscreen change to a set of numbers, I have had even marketing people proclaim that the blanket of confusion has been lifted from their eyes. Suddenly they understand why cash and profit are not the same thing. It really changes the dialogue when you’re doing business planning, negotiating loans, or evaluating new sales strategies.
But you really have to see it to believe it – just ask a member of our team to show you how it works.
Now let’s talk about Debits versus Credits…
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