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What the figures don’t say

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What figures don't say.

Each company is obliged legally to keep an accounting and to present balance sheet and income statement one or few times a year. For quoted companies, the main concern is to publish figures on line with the budget and expectations in order to give satisfaction to the investors.

It is obvious that a company needs to have an organized financial information system in order to drive the business, to see the evolutions, to compare actual figures and to compare with budgeted figures, and to take the appropriate actions in order to reach a determined target. It is always good to show good performances and else better performances than expected. But we have to keep in mind that such statements show only a picture on a time T. In order to measure trends, we need to compare statements over several periods. But is such analysis giving a good picture of the health of a company? Do positive figures mean that everything is fine in the company? Of course, figures need to be commented, but are the comments reflecting the entire reality? No, because comments will only speak about figures.

There are a lot of elements that a financial statement doesn’t show, but which could have impacts on the mid-term and long-term results of a business. Let us take for example the human resources. The human capital is the motor of a company. A lot of human resources aspects can produce negative or positive effects on the business. The satisfaction level of your employee is an important key indicator for your business. If people are not satisfied by their job or work conditions, they will probably leave the company. The result will be a loss of know-how, an increase of recruitment costs and a period of lower performance of the new employee who need a certain time to learn before to be fully operational. The consequence of a high human resources turnover and a decrease of know-how contribute to de-organize the company, with a negative impact on the activities, and a negative impact on the customer satisfaction. If you have a look on a financial statement and you see a profitable business when the accounts were closed, you can wonder how many times it will do so, if there are for instance human resources problems.

Often, we can note that companies are focused on human resources costs, and frequently try to maintain or decrease such expenses. If we have a look on the concept of cost or investment, costs or investment are commonly defined as a cash-out amount that will provide future economical advantages. In this case, the question to be asked is to know what will be the economical advantages produced by the employees. The performances of the advantages will be or could be proportional to the level of satisfaction, because satisfaction contributes to motivation, and to provide better performances. We can see here the importance to define the objectives of each collaborator and to give him the tools to reach the goals, by giving training programs for example. This implies a mid and long term view. Such view is important when we notice lacks of specific profiles on the market. When somebody is leaving the company and you cannot find somebody with the same qualification level, it could impact your business negatively and for small structures, put your business in danger. When for example, if a small software company has troubles to find software developers to develop or improve a product, the business will be negatively impacted and could rule the company to bankruptcy.

By taking such example, we underline the fact that a financial statement represent a instantaneous picture of the company but does not show the quality level and controls of processes. The question is to know if the incurred costs are the result of a mid and long term view and if they will generate sufficient revenues, contributing to ensure a sustainable business. This means that not only financial results indicators are important, but also qualitative measurements of all the constituting components of a company.


Written by Eric Saint-Guillain

January 16, 2011 at 12:48

2 Responses

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  1. I couldn’t agree more. Because there is no category on the P&L statement for the value of human capital and insufficient acknowledgement its positive impact on the bottom line, many business execs have foolishly adopted a cavalier attitude toward the organization’s most important asset.

    Over the past 20+ years in the U.S., that mind-set has led business leaders to rid their organizations of experienced, higher-salaried employees in exchange for younger, lower-salaried employees. The P & L salaries category has a smaller number, the bottom line has a larger number and company leaders can tell themselves and shareholders that business is better.

    We now live with the folly of that practice. Those typcially older displaced workers have found it very difficult to find new employment, because their salary expectations are higher. Attempts to obtain lower salaried employment also proves elusive, as such job seekers are labeled “over-qualified” and seen as a risk.

    This has resulted in disappearing paychecks which adversely effect the health of business and the tax base. Was it Peter Drucker who said you get what you measure? Thanks for an excellent post.

    Kim Clark

    April 16, 2011 at 19:04

    • Kim,

      Thank you very much for your comment. We have the same phenomenon about salary dump in Europe. The mistake is to consider employee costs as a cost and not as an investment who will generate future revenues. In my mind, we can clearly apply the ROI on personnel costs. I will take an example I saw in a software company where I worked during 2 years. I had a colleague who was a software engineer and who was a genius, a very brilliant guy. At that time, the company was facing a major problem with the last release of the software, and the whole application needed to be reviewed. The time needed to do this job was valued at 2 years. The person reviewed the application in 9 months ! When you have somebody like him in your company, you are not thinking first how much he will cost to me every month, but how much will I gain thanks to his efficiency.
      This is something businessmen should remember, if they want to ensure a sustainable business.

      Eric Saint-Guillain

      April 16, 2011 at 19:42

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