A question of context
Bri Williams, a CPA with a degree in applied psychology, runs People Patterns, a consultancy that helps businesses look beyond the spreadsheet. Her CPA Congress session, “Businesses don’t run on numbers, they run on responses to numbers”, was held in Melbourne, Perth and Brisbane.
All CPAs are experts in numbers, Williams said. But we also need to be experts in the behaviour around numbers, so that we can most effectively influence how decisions are made.
Too often, business decisions are driven only by hard numbers. But there is an inherent weakness in this – the fallacy that numbers are objective.
They’re not objective. Every number you see has been subjected to assumptions and interpretation and some may have even been input in error.
One piece of research found that a horrifying 88 per cent of spreadsheets contained errors.
Behavioural science shows that numbers are meaningless without context, and that how a number is presented can dramatically impact its influence on behaviour.
Have you ever wondered why Rolls-Royce cars are sold at boat shows, for example? Set among A$10 million boats, a A$500,000 car doesn't seem so outrageous.
One of my other favourite examples is how we talk about average life expectancy, which is 82 years. Imagine if someone said, “actually, you have 30,000 days to live”, perhaps you would live your life differently.
All of us make decisions that are not entirely rational. We may spend more time choosing shampoo than we do superannuation; or we may drive further to get four cents off a litre of petrol, even though it saves only a couple of dollars.
As accountants, it’s our role to help people make decisions and that means we are really in the job of understanding what influences people’s behaviour.
Just as we have frameworks for accounting rules and regulations, we can now use the framework of behavioural science to guide how best to influence our stakeholders, clients, staff and investors.
Using behavioural science to influence behaviour around numbers gives a hard edge to a soft skill.
Is the budget dead?
John Vaughan CPA, managing director of management accounting consultancy InfoCube, spoke on “The death of budgeting” in Adelaide.
Budgeting is dead – or at least, in its traditional form, it’s outdated at best and plain dumb at worst, Vaughan said.
The basic aims of budgeting are to refine strategy, define plans, allocate resources and set goals.
However, a budget alone doesn’t paint the entire planning picture and can often lead to gaming, where an organisation goes back and forth, manipulating the plan to achieve a set of numbers. To what end? Potentially, a huge waste of time and resources.
Businesses need to plan properly using smart planning tools, not personal planning products such as Excel spreadsheets.
The key is to accept that we need to avoid gaming and to use the plan continually, rather than as an annual, soon-to-be-redundant blueprint.
You must have a flexible enough planning system to react to an opportunity or a threat, to replan at very short notice and to pull the levers on the drivers that impact your organisation’s performance.
A key aim is to avoid being clouded by irrelevant detail. Planning at a highly granular level takes the focus off the real goals of doing business.
Plan at the frequency and horizon that matters to your business, dependent on volatility.
Operationally, business does not fall into nice, neat financial years, so why plan that way? If your trading environment is stable, planning with less frequency is fine.
We propose using planning accounts, having drivers in your plans, variable horizons, frequent updating of actuals and forecasts, and spending time to think – then analysing and reporting at the same level as you are planning.
If you have chosen the right drivers – either revenue or cost – you can report on them in the same environment as you are forecasting, so you develop a feel for what those drivers should be in the future and improve them on an ongoing basis.
This article is from the December 2013 issue of INTHEBLACK magazine.