Playing the numbers game……

My daughter is now old enough to drive and I have been doing the rounds of insurance companies to find out much it would cost us to allow her to drive one of our cars. The answer? A prohibitive amount that is how much. It is seemingly cheaper for her to buy an old banger and insure it herself.

I suppose I should defer to the insurers on this. They have the stats to back up their case. Clearly payouts on accidents for young drivers must be almost 20 times those of their older and allegedly better drivers or else they would not charge the premiums they do would they?

And yet I am slightly suspicious of the whole thing. My twenty odd years of working in finance has convinced me that you can do almost anything with numbers. By excluding this, or by highlighting that, a case can be made for almost any interpretation. It is one of the reasons why I am so cash focused when looking at any set of accounts.

Another example of the potential misuse of numbers could be the current approach to university fees. The argument being advanced is that statistics prove that students with a degree go on to earn oodles more than their contemporaries who are degreeless. They probably did in the past, but that was when, say 20%, of the working population had degrees. The next twenty years I would venture to suggest could be slightly different now you have almost 50% of school students now going into higher education. Based on a questionable interpretation of some numbers, a simple solution, higher fees, has been introduced rather than a more considered review of what higher education could and should be doing to provide what the country needs going forward.

Whenever I look at numbers I am forever trying to read between the lines, as it were, looking for the story that is not being told. Cash behaviour is one pointer to what is really happening. The context in which the numbers are being presented is another. When I doing a credit check I don’t just look at the numbers. I look at the business, the website, the directors, anything that helps me get a fuller picture. If I don’t do this, and solely rely on the numbers, then there is a serious risk of a wrong decision being made.

Fortunately there are some more cost effective insurance options available and I am sure my daughter will be on the road shortly. However I do worry about how the attitude to young drivers now will affect driving standards in the future. Yes they will make mistakes and some of them sadly will be tragic. However there is no substitute for being out on the road, and if historical statistics are being used to deny young drivers the opportunity to gain that experience, the long term results could be far worse than those which the insurance companies believe they are trying to avoid now.

Understanding the good books…..

It seems that our friends at HMRC are using a trial scheme aimed at looking into whether SMEs are keeping adequate books and records to investigate other potential tax misdemeanours. A report in the Telegraph claims that far from being a pilot scheme designed to test out the checking process HMRC staff are already threatening to delve into the tax affairs of those it suspects of wrongdoing.

Naturally HMRC deny that this is the case. However the fact remains that once the pilot scheme is over HMRC will almost certainly be knocking on the door of tens of thousands of small businesses to check their accounting is up to scratch, and will no doubt seek to extract suitable penalties in cases where inadequate books and records have led to underpayment of tax.

Is this a cause for alarm? Hmm, that depends doesn’t it? If you have been keeping proper books and records you should have nothing to worry about, right? Well up to a point m’lud, up to a point.

It has been a constant source of amazement to me how poor some of the bookkeeping and accounting that I come across has been. As a part time finance director I normally start to get involved in a company some time after it has started to trade, and much of my initial work often involves unpicking a number of historical accounting and bookkeeping errors, in order to ensure that meaningful management information is available and that a clean compliant set of books exist should an opportunity to raise further funds or sell the business arise.

Well that’s understandable I hear you say. Entrepreneurs are rarely interested in bookkeeping and accounts. They are interested in finance (or raising it), they like cash and they have a reasonable idea of profit and pricing of their key products, but tidy books are not normally high on their list of priorities.

And yet that is not always the case. Many of these businesses have used bookkeepers and accountants from the start and they are still in a mess. To be fair, it is often the case that the management of the business simply do not listen to what their accounts team is telling them. However I think there is another key reason why problems arise in this area.

Bookkeeping is more than just maintaining books and records. Good bookkeeping and accounting requires an understanding of what those books and records are actually saying about how the business is performing and where it is going. Many businesses have their accounts prepared by people who simply do not have the ability to provide this support and advice.

Whilst it is clear that HMRC’s reasons for pushing this compliance review are tax revenue driven, there could be a positive side to all this. Ultimately it is in everybody’s interest to improve financial record keeping and reporting. Businesses that have good financial records and management reporting systems have a much better chance of survival. The benefits of doing so will go beyond keeping HMRC happy and off of your back.

Who cares….wins?

Many column inches have already been devoted to the situation at Southern Cross, the care homes operator, whose dire financial situation is threatening the future care of 31,000 “vulnerable elderly people” in Britain. Private equity barons, in the guise this time of Blackstone, are once again being accused of exploiting the lax financial conditions of the banking boom years to extract obscene amounts of cash from what many see as primarily a social service.

However the finance director in me did alight on one key quote in the Mail On Sunday from the ex CFO Graham Sizer who said “The company was making a big profit when I left. What changed was that occupancy fell from about 90 per cent to 80 per cent. That is why the company is in trouble”.

It is a frequent contention of mine that most businesses are fairly simple financially speaking, with a limited number of key profit and cash drivers. In the case of Southern Cross, if you find yourself with high fixed costs as a result of your properties being sold off and replaced by long term rental agreements, it becomes a question of filling your care homes to the brim at the highest price possible. If prices and/or occupancy fall then you are in trouble.

The Southern Cross business was thus highly operationally geared which meant that when room rates and occupancy were high, profits and cash theoretically flowed into the business. Indeed the aforementioned Mail On Sunday’s Midas column made them one of their share tips in those halcyon pre austerity times at the beginning of 2010. However as we now know these key indicators subsequently moved the other way leading to the current parlous financial position of the company.

In many ways this has been an accident waiting to happen. In spite of countless long term care reviews the authorities are still putting their heads in the sand and refusing to deal with the issue. The fact remains that we as a nation do not care about long term care, at least not enough to actually pay for it. That is one of the reasons why the private equity owners were able to manage the business in the way they did, extract their mountains of cash, and seemingly leave behind a vulnerable business caring for vulnerable people.

Actually we clearly don’t care about cash enough either. Blackstone did. That’s why they won in the past. We need to get our act together and understand the basics of this business if we are to win in the future.