Blog Posts

Numerical Stage Fright

10/4/2018

In 1992 Vice President Dan Quale added an infamous “e” to the correct spelling of “potato”, and it made world headlines.

He later wrote: “It was a defining moment of the worst imaginable kind. I can’t overstate how exasperating the whole event was.” And who of us can't relate to thinking in the spotlight?

Fast forward to 2017 when British politician Diane Abbott nervously spluttered on radio as she tried to explain her plan for an additional 10,000 police officers… only she couldn't do the simple costing on air. She started with £300,000 before changing to £80m. That gives a range of between £30 and £8 000 per police offer per year. Bargains both.

South Africa's President Jacob Zuma famously got tongue-tied in parliament and couldn't pronounce a number in the billions. He just couldn't get the words out.

Stage fright and stress do weird things to people's mental abilities. Research has proven a strong correlation between emotions and cognitive functioning.

Best we all take a chill-pill around our numbers. Seriously relaxed is the way to go.

Peter.

The Ferrari Accountant

9/20/2018

Sergio Marchionne died this summer after leading Chrysler from certain bankruptcy, and then doing the same for Fiat.

He was a remarkable personality in the auto industry... a chain-smoking workaholic who knew not much about cars before taking over as CEO of Fiat and later merging it with Chrysler.

Marchionne did things differently, and knew what numbers to pay attention to.

He spent money on the seemingly little things like bathrooms. "How can you build nice cars when the employees' bathrooms are unfit for the workers?"

While he said, "Please don’t buy our electric version of the cute Fiat 500." He knew they lost $20 000 on each one.

But he saw the profits in Ferrari, which he spun off to be a separate company from parent Fiat Chrysler Automobiles.

In the end, his results measured up. After rescuing Chrysler from liquidation in the crash of 2008, he turned the company he bought for $2bn into an asset worth $84bn.

Farewell to you Mr Marchionne. You were fast driving even as you left your marque.

Peter.

Dan Brown's Next Mystery

9/6/2018

Wouldn’t it be exciting if Da Vinci Code author Dan Brown got his hands on the story of renaissance mathematician Fra Luca de Pacioli?

The good friar was the friend of Leonardo da Vinci. If Dan Brown unpicks difficult mysteries, Pacioli did the same for Da Vinci, helping the artist solve the challenge of the Last Supper’s famous dimensionality.

The Last Supper may have been a mere snack if Luca hadn’t helped with the painting’s dimensions. Pacioli guided his friend in seeing clearly how to fit the treasured work onto the awkward confines of a monastery dining room wall, above a doorway. And since then the friar has enabled us to see clearly too.

His 1494 treatise on how accounting works laid down the lines that have been used to shed light on business ever since.

C'mon Mr Brown... there’s got to be a bestseller in there, no? A genius accountant sees how to unravel the mysteries of corporate intrigue and makes a meal of the villains.

Yours in transparency,

Peter

The A-Bee-C of Success

8/24/2018

Me & the Bees is creating a buzz. Mikaila Ulmer turned her great-grandma’s lemonade recipe into an $11M Whole Foods deal. From which part of the profits go to honeybee causes.

Honey lemonade is sweet, but sweeter still is the story: Mikaila is just 13 years old and started the business at the age of four.

The lemonade’s winning ingredient may well be the honey, but it’s also business acumen. At the age of four, while most kids bring their teddy bears to show and tell, Mikaila had a lemonade stand at a children’s business fair.

Lemonade stands are an almost mythical entrepreneurial platform for children. And yet here is this young lady from Texas creating a very real business from her sidewalk venture.

The delightfully articulate Mikaila appeared on Shark Tank and talked to NBCabout how she got (literally) stung when she was starting out. Methinks with her business savvy, and no-doubt presence of behind-the-scenes advisors, this social entrepreneur won't get stung in business too often.

Wishing you a sweet week,

Peter

Profit Fads and Slippery Slopes

8/9/2018

Investors use a company’s profit this year as a starting point for predicting next year’s. The prognoses drive the company’s share price.

When making those predictions, it can be reasonable and make sense to adjust the reported profit figure so that it better foretells the future. But that’s where the trouble begins.

If your head-office burns down and leaves you with a big expense, a reasonable person will agree that the mishap probably isn’t going to recur next year. So go ahead and report a hypothetical profit figure that ignores that once-off expense.

Slippery slope alert here.

Indeed, while you’re at it, ignore all the expenses that aren’t reflective of what you earn from your regular operations. And why not also ignore those expenses that don’t immediately require cash to be paid. Hey, why not also ignore expenses that differ between parts of your business, like rent-in-New-York versus rent-in-Little-Rock.

These practices give so-called adjusted earnings figures, such as EBITDA, EBITDAR, EBITDAO, EBITDAX. Thesare are acronyms for...oh, never mind. Some other time.

Before you know it, you’ve got what famous investor Charlie Munger called “bullshit earnings”.

Don’t get us wrong… there’s a time and a place and a good argument for judicious use of reported-profit adjustments. But there’s also that business of too-much-of-a-good-thing.

Sending eyes-wide-open regards,

Peter

Scoring Value at the World Cup

7/26/2018

Before winning the Soccer World Cup, France coach and former captain Didier Deschamps said: “I hope the players benefit from my experience, but this is their final. It is something they have worked for”.

In the victory jubilation Deschamps was tossed in the air by his winning team and had every reason to feel proud of his role as steward of talent.

Business managers do well to imitate the French coach's appreciation of his people. To get the best out of your team, you need to value your players as your company’s biggest asset. They are the make or break between success and failure.

Research has shown that the number one determinant of happiness in the workplace is being appreciated. As a manager, your regard for your team members will determine how they perceive their value, and ultimately how they perform.

Accountants don’t show the value of people on a balance sheet. (Because we don’t own them and can’t measure their worth.) And yet HR managers rightly say “people are our greatest asset”.

At a soccer club, the contractual right to use the services of a player, if not the actual person, is often listed. For example, World Cup breakout teenage star Kylian Mbappé's contract is worth a cool $210m.

No need to remind his manager that business is both a people-game and a numbers game.

Wishing you a goal setting and scoring week,

Peter

Calculated Confidence

7/19/2018

A meme is trending on the Internet at the expense of math teachers. It goes something like this: “Remember your math teacher saying ‘You won’t have a calculator everywhere you go?’ Haha. They were wrong!”

A picture of a smartphone then follows as proof of said teacher’s mistake. But hang on a second.

Calculators are ubiquitous. But former math students shouldn’t be gloating. Always-at-hand calculators have made us lose our mental numeracy. And that’s a bad thing. Because numeracy goes beyond numbers. It allows us to reason and solve problems in both our professional and personal lives.

Numeracy is closely linked with self-esteem, which in turn affects decision-making. When we solve a math challenge, we gain confidence and the ability to navigate life situations with positivity and innate self-belief.

In working with business numbers, as with mental arithmetic, practice builds confidence, and confidence encourages practice.

The more confident managers feel around financial statements the more they use them, and the more insights they gain about their business. The result is better decisions.

We educators are first and foremost in the confidence building business.

Peter

(Gender) Balance in Accounting

7/12/2018

It is a truth universally acknowledged that a business seeking better returns must be in want of women. (Sorry, Jane Austen)

You see, research has shown that businesses - and particularly investment managers - perform better with a balance of men and women in the workplace.

Too much testosterone can wreak havoc on financial behaviour. So here’s the conundrum: why are there not more women in executive leadership roles?

“Women and minorities manage only 1% of the asset management industry’s $71 trillion in assets and only 15% of global mutual fund managers are women” says Girls Who Invest. It’s an organization that’s done the sums and exists to change them.

Girls Who Invest selects about a hundred female students each year after a hard-fought application process. It then puts them through three-week summer camps at Wharton and the University of Notre Dame. The women emerge prepped and inspired for a career in finance.

Each year, after teaching the Color Accounting module at the camps, we leave uplifted. The bright minds of the savvy up-and-comers, from widely diverse backgrounds, give us great cause for optimism.

Clearly, balance shouldn’t only happen on balance sheets.

Peter

Riding the Light Beam

7/5/2018

Albert Einstein, the greatest scientific genius of his time, changed the very way we understand the universe.

He discovered the truths that led to the equation E=MC2 and the theory of relativity by conducting visual thought experiments. Famously, he imagined riding alongside a beam of light.

Einstein had been unhappy at school in Germany where, in the late 1800s, schooling was rigid and all about rote learning. So he moved to German-speaking Switzerland and sought out a school in Aarau which followed the principles of Johann Pestalozzi, an educational reformer. Those principles made all the difference and set him on the path to his breakthroughs.

Pestalozzi’s motto was “Learning by head, hand and heart”. He wrote that “Visual understanding is the essential and only true means of teaching how to judge things correctly.” The learning of numbers must be subordinated to first understanding concepts, he believed.

On so many levels, our worldwide community of Color Accounting educators are proud to call ourselves “Pestalozzians”. Belief in the individual. Use of hands in the learning process. The power of the visual BaSIS Framework we use. And even the priority of words over numbers as one learns to make sense of financial statements.

200 years later we are unreservedly happy to take our hats off to you, Johann Heinrich Pestalozzi, with a deference you wouldn’t demand from us.

Peter

How Accountants Sort Things Out

6/28/2018

How accountants sort things can have serious consequences. And provide some fun.

In our business acumen workshops, managers talk about how they organize their kitchen or their clothes. There’s a lot of laughter as the obsessive-compulsives in the room get outed for their color-matching proclivities.

Photo by Hannah Morgan on Unsplash

Applied to accounting, we ask questions like: should we classify the cost of a trip to meet with a client as Marketing or, perhaps, Travel? And if Travel, should we break out airfares from ground travel?

The important lesson is that we can obscure financial information by how we aggregate, slice and describe it.

For example, when a mining company’s sales are reported on its income statement by type of mineral rather than by mining region, it can disguise how much of the company's activities happen in dodgy places.

Back in the classroom, our recent favorite classification was a student who said she organized the novels on her bookshelf by how the authors would get along. Who needs alphabetic when you have that kind of insight?

Peter