Dangerous 'Health Check'

by admin on March 23, 2009

in General,Innovation

bankbalanceThere is only one thing worse than bad figures and that’s a bad interpretation of those figures. It compounds the problem. Or at least I thought so until today when I saw a ‘Health Check’ report that Kashflow is delivering to its customers.

The report is unsound and unreliable. It provides no explanation as to how the numbers were arrived at or the interaction between them. That’s why we have professional accountants and not people who put their finger in the air. Whomever Kashflow consulted needs a lesson in cash management because this report is not it.

The report says:”This Health Check looks at a number of different factors in your business that can be used as an indication of how healthy your business is. Each factor is scored individually and then some additional information is given on how you can improve your score. At the end of the report is an overall score for your business.”

There is no clue as to how the numbers come together or how different industries are assessed. This is a fundamental weakness.

The first piece: ‘money in the bank’ looks at an average, trebles it and concludes that because the ‘customer’ has considerably less that there is a real problem. The assumption is that the business needs three months cash. Why? Alongside, a graph is shown indicating that average balances are falling fairly steeply and is well below the figure asserted to be on hand. Where is the assessment of why that might be? This turns into a ‘score’ of 30%

The next piece of information talks about the largest customer being responsible for 21% of revenue. Nothing is said about their ability to pay but the 21% reliance is assessed as ‘not being anywhere near the danger zone.’ What is the threshold? Given the decline in bank balance, to what extent can that be attributed to this large customer? This scores 80%

Finally, we are told that out of 244 customers, 45% of them have only bought once, 37% have bought 4 times or more and 20% have bought 8 or more times. This is utterly meaningless without a corresponding assessment of sales value per transaction and both the average and spread of deal values.  How for example is our ‘customer’ going to treble his bank balance, if that is indeed the recommendation when there is so little monetary data in this last set of figures? Nevertheless, this translates into a score of 40%.

The overall score is said to be 57%. I have no clue what this is meant to represent because different elements in the equation would have different weightings at different points in time. Neither is it explained. In times like this, customers need explanations so they know where to concentrate their efforts.

There is no assessment of days sales outstanding, neither is there any analysis of the creditor position. Neither is there any peer comparison. Credit conditions vary around the country so what might appear poor overall might be regarded as average in another context.

Kashflow has tried hard to arrive at something that might be useful to business. They are to be applauded. But thie outcome is dangerously inappropriate. Far better to obtain a copy of a CIMA report on cash management which is easy to read and which provides research based benchmarking data against which to assess your business. It also provides solid tips as to what to do.  It is a little dated so some of the broad assumptions might need adjusting.

Better still, get your professional advisor to walk you through what each element means and why it is important.

Financial analysis is not easy. It takes significant skill. Assessing credit risk is similarly difficult because we inevitably have partial information. But professionals know how to make this come together. It’s something I bult my practice upon.

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Stuart Whitman March 23, 2009 at 6:29 pm

I don’t think your comparing like with like. What Kashflow have developed is a simple straight forward report that “can be used as an indication of how healthy
your business is”. That’s fine, that’s all I want. I’m sure the CIMA report is absolutely correct but if I want that detail I’ll dive in to my other reports to get the detail or speak to my accountant for some professional advice.

The 3 sections:

Money in the bank – I think we all know this one and why not use 3 months as a benchmark
Reliance on a single customer – don’t put put all your eggs in one basket
Making the most from your existing customers – isn’t it true that your existing customers are your “Goldmine”

are self explanitory and provide a *simple* overview as to how my business is performing.

I don’t think Kashflow are suggesting you run your business based on this, what they’re trying to do is provide simple indicators based upon common sense and reasonable calculations.

Dennis Howlett March 23, 2009 at 9:43 pm

@stuart: the figures don't make any sense so I have no clue what they're trying to indicate. Therefore they are useless at best and dangerous at worst. The data shows that businesses which don't manage their affairs as professionally as any other part of their business underperform at best. I've seen it time and again over 10 years of doing restructuring both large and small businesses.

These are highly precarious times – understanding the numbers and RISK is more important than it has been in my lifetime.

The advice is generic but doesn't relate to anything. Goodness knows what they're hiding.

Clear Books March 23, 2009 at 6:35 pm

“Assessing credit risk is similarly difficult because we inevitably have partial information. But professionals know how to make this come together”

Even professionals get it wrong. Credit crunch?

Fudge (but not the b March 23, 2009 at 9:41 pm

Sounds as if this report is far superior to the only real comparison I have available – the QuickBooks cashflow forecast.

Surely part of the point here is that the report is a quick snapshot, and by performing whatever calculations it does at a given point in time helps the business owner to build a metric around it – and if they desire (and if it seems accurate and appropriate to them), to incorporate that into their own system of checks and balances?

Doesn't seem as if this sort of forecast or snapshot is intended to replace professional financial analysis – and anyone who expects it to is in for a (deserved) shock..

Dennis Howlett March 23, 2009 at 9:52 pm

@ClearBooks funny – but irrelevant to this discussion. @Fudge – the numbers Kashflow ascribes are meaningless. Using your logic, any figures are OK and that's simply untrue.

If there is no intention to replace then what's the point?

To the point you're all making and using the same logic, I might as well put any figures on the base numbers, stick a finger in the air and say the same. It won't do. It's unprofessional and dangerous.

According to Kashflow – the balance had fallen to £3K but the graph shows considerably less. That means the numbers are plain wrong. What sort of decisions do you want to make? One based on meaning or ones that are wrong? Your choice.

Stuart Jones March 23, 2009 at 10:32 pm

Two things Dennis:

1. It's lucky you are thick -skinned like me; and

2. Why do so few value a chartered accountant's comment about what should be a report based on accounts?

Dennis Howlett March 23, 2009 at 10:52 pm

I've concluded that as professionals we're doing a terrible job at communicating when form over substance is more important. More here: http://www.ion.icaew.com/itcounts/17316

Stuart Whitman March 24, 2009 at 2:06 pm

Dennis,

Your looking at the report from a GRC standpoint and then comparing it with software applications that perform a different function or are of a different magnitude.

You cannot compare the Kashflow 'health check' report with something like Validis.

The fact that Future Route have written an application to provide Instant in-depth financial insight is to be applauded but as you pointed out "Validis have spent fortunes on understanding what current asset data means". They identified a need in the marketplace and have created a sophisticated tool to analyze accounting data based upon bioinformatics and inductive logic.

For the most part Kashflow, Sage, MYOB, Quickbooks, TAS, Mamut etc are not in the business of data analysis they're providing solutions to people like me who want accounting software that is easy to use, easy to understand and designed for non-accountants to use.

To say "those who are commenting clearly don't see the value in managing their business in a professional manner" is nonsense. What people are saying is that you should use the information in the right context and understand the types of people who it is directed at.

If I was using SAP, had a multi-national company a governance, risk and compliance dept then I'd agree with you, but at the moment there's just me, Kashflow and £15 per month.

Emily Coltman March 24, 2009 at 3:37 pm

I've just read through the report along with Dennis's post.

I would be interested to hear where the calculations and weightings come from, too, and would encourage Kashflow to provide this alongside the report.

I also agree with the comment that the reader needs to know sales value per customer. If the one-off customers are buying high-value products and the repeat customers aren't paying much – the equation changes.

But I would also ask Dennis whether this post isn't worded a bit strongly. Yes there is room for improvement, but I would dispute that the report is "dangerously inappropriate".

At the moment, if I were Duane, I'd be thinking, "Infamy! Infamy! Dennis has got it in for me!"
:-)

M

Dennis Howlett March 24, 2009 at 8:42 pm

@stuart – so the fact there is no context or explanation as to how these numbers were arrived at doesn't matter?

@M – yes, I am harsh and for a reason. If you or I did something like this, ICAEW would have every justification to string us up and hang us out to dry. Software companies have been failing to take responsibility for too many years.

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