Exploding Conventional Wisdom

The accountant usually has a feel for what’s really going on. My grandfather’s accountant, Lloyd Smith, had a client in the construction business. While doing the financial statements, Lloyd realized that some of the projects were losing money. The owner brushed him off. He said he knew all his staff and suppliers. He knew what went into each project. There was no way he could lose money on any of them. Lloyd set out to determine the truth. All of the purchases for a project were stored in an envelope and the labour charges were written on the outside. Lloyd pored over the purchase journal and payroll records to find out exactly what a sample of projects was costing. Sure enough, he was able to prove that some of the projects were indeed losing money. That got the owner’s attention and changes were immediately put into place.

That’s what I call Business Intelligence. The purpose of BI is to support better business decision making. One of its best uses is to build a case to explode conventional wisdom, those tired explanations (excuses?) for why things are the way they are.

The paper in my file had been photocopied and carried forward so many years that it was almost illegible. It explained why the fuel oil inventory at my client showed as negative. Apparently, the oil was taken out of inventory faster than the purchase records could catch up with it. I used a report writer to look at the ins and outs of fuel oil. The conventional wisdom had to be wrong. January 2nd at the northern Ontario mine site was cold and snowy as the inventory supervisor and I climbed to the top of the storage tank to lower the knotted rope and see just how much oil was in the tank. I’m sure he was swearing at auditors in general and me in particular, but outwardly the man was friendly. The result, however, was significant. The difference between my computer report and what we found in the tank turned out to have been caused by a computer field that was too small to hold the large quantity of oil (measured in liters). It was dropping two decimal places from the calculations. As a result, immediate changes were made to the computer system.

In your company, are you hearing the same explanations over and over as to why sales are below budget? Does something just seem wonky in the direct costs or manufacturing overhead? This is where all that money you spent on technology and training can really pay off. If your spider senses are tingling as you look at the financial statements, go with your gut and delve into the data.

Start with the conventional wisdom, e.g. “sales are down because of the high Canadian dollar”. Ask yourself how you could prove that statement true or false. For example, you could determine the actual effect of the change in exchange rates and see if it’s significant. You could drill down on sales by product / salesperson / sales territory to see if the effect is across the board or only with a specific item / salesperson / geographic location. Follow your experience, but use the technology to support your results. People are not going to change just because you say so. They will need documented proof. Conventional wisdom is difficult to refute.

When you have your answer, spend a little more time with the technology to make the resulting report easy to read, then show it to the operational people responsible. Better decision making may just be the result.

2 Comments on “Exploding Conventional Wisdom

  1. Good advice. I don’t have much to add except to point out that the first paragraph reminds me of the “envelope budget” school of personal finance.

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