Casebook
Really, this webpage is supposed to be under construction. But meanwhile here is some
light entertainment to be going on with. Apparently it entertains Google as well.
Systems Recovery Management
Few of these occasions provide opportunities for nice neat narratives, but this firm was an illustrative case.
The firm sold avionic equipments. The Controller was a personable and bright young accountant (BYA), who lacked the ability (and the staff resources) to reconcile the Balance Sheet regularly. No accounts had been seen for many months, transaction processing was weeks in arrears, relations with the system’s software house had broken down. Staff were baffled and demoralised. The MD was a capital equipment salesman, very good at his job, not so experienced a manager.
He asked me to turn up the first morning at 9.30, shook me by the hand, and remarked that we were seeing the Bank Manager at 2.30 that afternoon. The Bank manager was, frankly, nervous. The arrears in Billings had stretched the overdraft. I confined myself to the minimum - it was my first day, the situation was being studied, I had handled a lot of these problems, always successfully. This was Tuesday, I would telephone him on Friday when we would decide about a future meeting. And so on.
Events soon led me past the software house to the OEM of the computer installation, and a mix of relationship building and technical knowledge won their confidence.
They
a) admitted that the basic problem was an operating system error (which scrambled files and caused the difficulties the BYA had experienced) and
b) advised that my first proposed solution, which was to hang more terminals onto the Central Processor unit, then get the invoicing backlog input, would actually make the problem worse. (Technically, the problem concerned the way the central processor handled interrupts from multiple terminals).
c) were willing to come along and rebuild those corrupted files (which needed hex – level skills)
So I had to do something cleverer / more adroit. Which successfully solved our problem. I used fewer terminals, to avoid the terminal fall-overs, but shift – working to get the extra data processed. That fixed it. But threw a considerable load upon the supervision level in the company. I fixed that too.
So this problem had Financing, Accounting, IT, and Personnel aspects. Though dated, the mix of observation (so that the analysis/ diagnosis is correct), technical knowledge, relationship building, and thoroughness in execution, is an excellent illustration of why I am effective when others have not been.
I never did need to meet the Bank Manager again, though we had a pleasant lunch much later. As the invoicing went out, the money came in and the overdraft moved down. There was a lot more to do in tidying the accounts, but that is a longer story.
Few of these occasions provide opportunities for nice neat narratives, but this firm was an illustrative case.
The firm sold avionic equipments. The Controller was a personable and bright young accountant (BYA), who lacked the ability (and the staff resources) to reconcile the Balance Sheet regularly. No accounts had been seen for many months, transaction processing was weeks in arrears, relations with the system’s software house had broken down. Staff were baffled and demoralised. The MD was a capital equipment salesman, very good at his job, not so experienced a manager.
He asked me to turn up the first morning at 9.30, shook me by the hand, and remarked that we were seeing the Bank Manager at 2.30 that afternoon. The Bank manager was, frankly, nervous. The arrears in Billings had stretched the overdraft. I confined myself to the minimum - it was my first day, the situation was being studied, I had handled a lot of these problems, always successfully. This was Tuesday, I would telephone him on Friday when we would decide about a future meeting. And so on.
Events soon led me past the software house to the OEM of the computer installation, and a mix of relationship building and technical knowledge won their confidence.
They
a) admitted that the basic problem was an operating system error (which scrambled files and caused the difficulties the BYA had experienced) and
b) advised that my first proposed solution, which was to hang more terminals onto the Central Processor unit, then get the invoicing backlog input, would actually make the problem worse. (Technically, the problem concerned the way the central processor handled interrupts from multiple terminals).
c) were willing to come along and rebuild those corrupted files (which needed hex – level skills)
So I had to do something cleverer / more adroit. Which successfully solved our problem. I used fewer terminals, to avoid the terminal fall-overs, but shift – working to get the extra data processed. That fixed it. But threw a considerable load upon the supervision level in the company. I fixed that too.
So this problem had Financing, Accounting, IT, and Personnel aspects. Though dated, the mix of observation (so that the analysis/ diagnosis is correct), technical knowledge, relationship building, and thoroughness in execution, is an excellent illustration of why I am effective when others have not been.
I never did need to meet the Bank Manager again, though we had a pleasant lunch much later. As the invoicing went out, the money came in and the overdraft moved down. There was a lot more to do in tidying the accounts, but that is a longer story.
Nice Frauds I have known
I have done a fair amount of fraud work, some of it really grubby, some of it immensely distressing in human terms - whatever one might think of the ethics of the perpetrator(s). The following was one of the more elegant. Unfortunately, to fully appreciate it, it needs to be remembered it took place very early in my career. When air travel was a great deal rarer than it is now, and long distance telephone calls were next-to-never made.
Miss Green (almost certainly not her real name) was the senior book-keeper at the company. There was no FD. She had joined the firm earlier that year. She sat on a platform at the end of the accounts office – which comprised a very large international sales ledger, run on banks of NCR Accounting Machines, of the old- fashioned mechanical sort, ranged down the room. And a much smaller purchase ledger. The firm sold its (mundane) products world-wide. It was a place where one knew one’s place. We the auditors sat on the stairs to tick the books. The stairs were covered in linoleum. Along the walnut panelled and red-carpeted corridor above us, at 11.am each morning, a waitress in a starched pinafore and cap, complementing her black outfit, carried the coffee into the director’s offices. The coffee service was nice Georgian silver, complete with spirit lamps to keep the liquid at the proper temperature. The tray was Georgian silver too. They did these things properly. I know they did them properly because I was entrusted with the Fixed Assets Register, wherein these assets were detailed – right down to the hall marks. The Directors were second or third generation owners, mostly sons and cousins. They enjoyed a very gracious, and none too arduous, lifestyle. Though of course lifestyle was a word they themselves would never, ever, have utilised. The business nearly ran itself. Eventually it succumbed to the likes of Jim Slater, of Slater Walker fame.
Miss Green presided over the accounts department with a rod of iron. She was thin and well over six feet tall, with long black hair and an exceptionally pale complexion. If she had swallowed a pea one felt one would have noticed it. These were the days of Crimplene shift – dresses and mini-skirts, so girls were thin anyway.
The Annual Summer Holidays came round. The numerous warehouse staff all took a fortnight’s holiday, in two groups, in August. Early in August Miss Green did the payroll, and took the payroll cheque into those directors who normally signed it.
(Adopt a plummy and upper –class accent to read the next bit.) “SomeWhat Large cheque this week Miss Green?” (revert to normal accent for Miss Green) “ Yes Mr Brown, it’s the warehouse staff – they get their two weeks holiday pay in advance this week” (Plummy accent again) “Oh Yes of course, quite so.” With the cheque signed, Miss Green went down to the Bank, collected the cash, made up the envelopes and paid the first group of staff their entitlements.
The next week she did the same thing, but was careful to pay the holidaying staff again. She made up the cheque, took it into the Directors, and the Conversation went along the lines (Plummy accent again) “Large Cheque again this week Miss Green? – Oh Yes of course – Staff Holidays, Quite so, Quite so. Signed as usual.” Miss Green progressed to the bank, drew the net pay, and reserved the extra week’s pay she had obtained for the capacious handbag in which (too literally) “she took the important work home”. She repeated this for each of the 4 weeks of August, and things went back to normal.
At the end of September, Miss Green approached the Directors. Her manner was a nice mix of the deferential, the sad, the resigned, and of course, the determined. She was sorry, but she had leukaemia. She had months to live. She was regretful, but she felt it her duty to resign. For reasons everyone was too too polite to question, she wished to go to New Zealand (yes, right at the other end of the Planet) to lay her bones.
The Directors were gentlemen. They knew how to react. The facts fitted perfectly with the lady’s unusual appearance. Thin, pale. It explained everything. They were both courteous and considerate. Almost unprompted, they contributed Miss Green’s air ticket to New Zealand as her leaving present, and as a gesture of condolence. It really was exceptionally generous. With regret, they set about recruiting a successor.
It was not until the following January that the successor was asked to begin the annual payroll review for the staff. She commenced by reviewing the Gross Pay for everyone. It was very odd, but somehow the figures did not seem to tie up. The Auditors were sent for, which is how I came to know of this matter. It did not take us too long to work out that Miss Green had, via the holiday pay, abstracted two extra weeks money for all the weekly paid staff, and had then absconded.
It was too late by then. Miss Green was in New Zealand (except I suspect she went elsewhere). The perfecting touch was that the Directors had paid for the getaway as well.
So elegant, so gracious. The Directors were rich enough, and well – bred enough, to not even pursue her. Plus of course there was that element of doubt. One could never pursue a dying person, perhaps desperate to provide for their last days.
There is a small postscript. A decade or two later, I heard a tale about a similar fraud not 50 miles away. Details were sufficient to make me think Miss Green was still operating.
I always wondered if she did the same fraud in New Zealand. Paid travel both ways ? - I’ll be bound.
I have done a fair amount of fraud work, some of it really grubby, some of it immensely distressing in human terms - whatever one might think of the ethics of the perpetrator(s). The following was one of the more elegant. Unfortunately, to fully appreciate it, it needs to be remembered it took place very early in my career. When air travel was a great deal rarer than it is now, and long distance telephone calls were next-to-never made.
Miss Green (almost certainly not her real name) was the senior book-keeper at the company. There was no FD. She had joined the firm earlier that year. She sat on a platform at the end of the accounts office – which comprised a very large international sales ledger, run on banks of NCR Accounting Machines, of the old- fashioned mechanical sort, ranged down the room. And a much smaller purchase ledger. The firm sold its (mundane) products world-wide. It was a place where one knew one’s place. We the auditors sat on the stairs to tick the books. The stairs were covered in linoleum. Along the walnut panelled and red-carpeted corridor above us, at 11.am each morning, a waitress in a starched pinafore and cap, complementing her black outfit, carried the coffee into the director’s offices. The coffee service was nice Georgian silver, complete with spirit lamps to keep the liquid at the proper temperature. The tray was Georgian silver too. They did these things properly. I know they did them properly because I was entrusted with the Fixed Assets Register, wherein these assets were detailed – right down to the hall marks. The Directors were second or third generation owners, mostly sons and cousins. They enjoyed a very gracious, and none too arduous, lifestyle. Though of course lifestyle was a word they themselves would never, ever, have utilised. The business nearly ran itself. Eventually it succumbed to the likes of Jim Slater, of Slater Walker fame.
Miss Green presided over the accounts department with a rod of iron. She was thin and well over six feet tall, with long black hair and an exceptionally pale complexion. If she had swallowed a pea one felt one would have noticed it. These were the days of Crimplene shift – dresses and mini-skirts, so girls were thin anyway.
The Annual Summer Holidays came round. The numerous warehouse staff all took a fortnight’s holiday, in two groups, in August. Early in August Miss Green did the payroll, and took the payroll cheque into those directors who normally signed it.
(Adopt a plummy and upper –class accent to read the next bit.) “SomeWhat Large cheque this week Miss Green?” (revert to normal accent for Miss Green) “ Yes Mr Brown, it’s the warehouse staff – they get their two weeks holiday pay in advance this week” (Plummy accent again) “Oh Yes of course, quite so.” With the cheque signed, Miss Green went down to the Bank, collected the cash, made up the envelopes and paid the first group of staff their entitlements.
The next week she did the same thing, but was careful to pay the holidaying staff again. She made up the cheque, took it into the Directors, and the Conversation went along the lines (Plummy accent again) “Large Cheque again this week Miss Green? – Oh Yes of course – Staff Holidays, Quite so, Quite so. Signed as usual.” Miss Green progressed to the bank, drew the net pay, and reserved the extra week’s pay she had obtained for the capacious handbag in which (too literally) “she took the important work home”. She repeated this for each of the 4 weeks of August, and things went back to normal.
At the end of September, Miss Green approached the Directors. Her manner was a nice mix of the deferential, the sad, the resigned, and of course, the determined. She was sorry, but she had leukaemia. She had months to live. She was regretful, but she felt it her duty to resign. For reasons everyone was too too polite to question, she wished to go to New Zealand (yes, right at the other end of the Planet) to lay her bones.
The Directors were gentlemen. They knew how to react. The facts fitted perfectly with the lady’s unusual appearance. Thin, pale. It explained everything. They were both courteous and considerate. Almost unprompted, they contributed Miss Green’s air ticket to New Zealand as her leaving present, and as a gesture of condolence. It really was exceptionally generous. With regret, they set about recruiting a successor.
It was not until the following January that the successor was asked to begin the annual payroll review for the staff. She commenced by reviewing the Gross Pay for everyone. It was very odd, but somehow the figures did not seem to tie up. The Auditors were sent for, which is how I came to know of this matter. It did not take us too long to work out that Miss Green had, via the holiday pay, abstracted two extra weeks money for all the weekly paid staff, and had then absconded.
It was too late by then. Miss Green was in New Zealand (except I suspect she went elsewhere). The perfecting touch was that the Directors had paid for the getaway as well.
So elegant, so gracious. The Directors were rich enough, and well – bred enough, to not even pursue her. Plus of course there was that element of doubt. One could never pursue a dying person, perhaps desperate to provide for their last days.
There is a small postscript. A decade or two later, I heard a tale about a similar fraud not 50 miles away. Details were sufficient to make me think Miss Green was still operating.
I always wondered if she did the same fraud in New Zealand. Paid travel both ways ? - I’ll be bound.
Why don’t we have factories any more?
To appreciate this tale you need a head for technicalities – but not too involved a one. And you have to like factories – and I do.
In the early 1980’s I had a wonderful job, at least it sounded wonderful. The job title was Strip Shop Accountant. It conjured up all sorts of masculine bliss. The reality was masculine enough, but not so blissful. The Strip Shop concerned was in an engineering works. It made bi-metallic strip, about 50 miles of it most weeks. The strip was manufactured by pouring fancy lead/copper/tin alloys, molten, from an electrically heated crucible onto steel backing strip, as the strip moved by. For the metallurgically inclined, the aim was to get “good dendrition “ (which meant that the lead elements of the alloy cooled into an even lattice within the copper-tin carrier, and under a microscope the lead showed a pattern like branches of a tree (“dendrites”) within the copper – tin matrix). Getting good dendrition was a black art, very temperature sensitive, which all took place in a few critical feet of a cooling chute just downstream of the pouring crucible. It didn’t take a genius to work out that holding as many elements as possible of this process constant was probably the key to consistent quality.
I wasn’t a genius, but I was there to provide information. There were few tools to do it with. We knew that the Strip Shops were Hot, Dirty (we used bitumen as a lubricant, and it went everywhere) Noisy and Expensive. We accountants even knew How Expensive. Because we could measure the money going in with reasonable certainty. And we knew what came out as well - it went into other manufacturing processes in other parts (cleaner, simpler) of the same factory. What happened in between, and which of the 35,000 products we made cost what, we did not know. The labour force knew that certain jobs were “bad runners” but expenditure controls were rigid, there was no money for instrumenting the plant for information. I had to work with what we had. Pencils mainly. For big numbers (and the annual output of “My Shops” alone was around £50m at 2006 prices), I was allowed to count on my toes as well.
I worked my way down the expenditure categories in order of importance. Fancy metals first, then steel, and some time later, energy and related materials. We used inert gases in quantity. Alloys only alloyed well if there was no oxygen present, and nitrogen and other gases like hydrogen were used to exclude and absorb the oxygen – I got to know a good deal about them. I did good work here.
So when I got to electricity, as a great concession, I wangled some money to track what was going on. All we had to start with was a monthly bill. It was of course huge. How did it arise? What used it? There was no metering on individual machines - crucibles, conditioning furnaces (to heat the moving steel strip to suitable temperatures), annealing plant - so what to do? I wanted to know what cost what?
At one end of the shop was the Load Shedding Equipment, into and out of which ran enormous electricity cables. I was good at getting engineers and other technical people to tell me about their skills, so I gathered we could measure the electricity going through the cables by clamping an Electronic Monitoring Device onto the cables. The device would measure at any intervals we chose – we could see what the demand was from a print out. The clamps would go on any machine, so we could learn something about anything we chose. I was allowed to rent the equipment for a whole month (think of it – a whole month!) We started at the Load Shedding Equipment, intending to work our way down the processes until the month ran out.
Now we need a short educational excursion into the niceties of industrial electricity tariffs. And the economics of copper. It works like this.
Our plant is in the Thames Valley. That’s a long way from the Nottinghamshire coalfield, where the electricity is generated (or so we were told). The point is that to get the electricity to the factory you need a cable, Copper, expensive. And its diameter has to be large enough to carry the MAXIMUM EXPECTED LOAD of electricity that the plant will demand. Put too much down the wire, and like any other, it will melt.
The Electricity Company has to pay for the cable. So to get its money back, and reduce the amount it has to invest, it arranges the electricity tariff so that the base load is at a “normal” price, but higher amounts of demand (more kilowatts) come at very high prices. So the demand is price – sliced. Use more than a certain level and you go onto a much more costly price per unit used.
To counter this, the customer installs Load Shedding Equipment. Its fairly simple. It measures demand at the plant, and when it gets above a certain level, it shuts off certain items in the plant. Cuts the consumption, keeps the costs down. Ours was a wall – full of mechanical devices, like solenoids, complete with switches and sparks and dust. It was very dark. No one knew how it worked, it had always been there, and set that way.
Now a small further digression to the Social History of the Plant. This had many facets and was intriguing, but only part of it can detain us here. The firm was part of a large international group. It was Group Policy to use vending machines for all staff drinks. After all, the Group made the machines, and they needed a market. And so they were installed. The flavour of the drinks produced did not meet with favour (yes, you read that right), so despite an official ban, the office staff brought in kettles and arranged unofficial commissariats.
Yes, you guessed it. When the office staff, several hundred of them, came in each morning at 9.00, they all started the day with a hot drink. The Load Shedding Equipment sensed the increase in the total electricity load, and started shutting down the major items of plant. Including the furnaces in the Strip Shops. So (I suppose) we made bad quality for a bit, until the temperatures came back onto tolerance. Actually, I never proved that bit, because quite smartly we re-programmed the Load Shedding.
And not too long after, I was made redundant, along with 400 other poor souls. The plant went from 2000 to 1600 heads at that round of redundancies. And a few years later it was closed completely. Still no measuring instruments or costing systems of course. Just cut, cut, cut. The Finance Director of the Plant went onto the Group Board of the Holding Company for his exploits. Attaboy. The rest of us went onto the street.
So, if you run a factory, remember it’s the not just the technology, its also the personnel policies which determine its profitability – and indeed its survival.
And, why don’t we have factories? Yep, it’s the coffee breaks. And the tea machines. But remember, never the FD !
To appreciate this tale you need a head for technicalities – but not too involved a one. And you have to like factories – and I do.
In the early 1980’s I had a wonderful job, at least it sounded wonderful. The job title was Strip Shop Accountant. It conjured up all sorts of masculine bliss. The reality was masculine enough, but not so blissful. The Strip Shop concerned was in an engineering works. It made bi-metallic strip, about 50 miles of it most weeks. The strip was manufactured by pouring fancy lead/copper/tin alloys, molten, from an electrically heated crucible onto steel backing strip, as the strip moved by. For the metallurgically inclined, the aim was to get “good dendrition “ (which meant that the lead elements of the alloy cooled into an even lattice within the copper-tin carrier, and under a microscope the lead showed a pattern like branches of a tree (“dendrites”) within the copper – tin matrix). Getting good dendrition was a black art, very temperature sensitive, which all took place in a few critical feet of a cooling chute just downstream of the pouring crucible. It didn’t take a genius to work out that holding as many elements as possible of this process constant was probably the key to consistent quality.
I wasn’t a genius, but I was there to provide information. There were few tools to do it with. We knew that the Strip Shops were Hot, Dirty (we used bitumen as a lubricant, and it went everywhere) Noisy and Expensive. We accountants even knew How Expensive. Because we could measure the money going in with reasonable certainty. And we knew what came out as well - it went into other manufacturing processes in other parts (cleaner, simpler) of the same factory. What happened in between, and which of the 35,000 products we made cost what, we did not know. The labour force knew that certain jobs were “bad runners” but expenditure controls were rigid, there was no money for instrumenting the plant for information. I had to work with what we had. Pencils mainly. For big numbers (and the annual output of “My Shops” alone was around £50m at 2006 prices), I was allowed to count on my toes as well.
I worked my way down the expenditure categories in order of importance. Fancy metals first, then steel, and some time later, energy and related materials. We used inert gases in quantity. Alloys only alloyed well if there was no oxygen present, and nitrogen and other gases like hydrogen were used to exclude and absorb the oxygen – I got to know a good deal about them. I did good work here.
So when I got to electricity, as a great concession, I wangled some money to track what was going on. All we had to start with was a monthly bill. It was of course huge. How did it arise? What used it? There was no metering on individual machines - crucibles, conditioning furnaces (to heat the moving steel strip to suitable temperatures), annealing plant - so what to do? I wanted to know what cost what?
At one end of the shop was the Load Shedding Equipment, into and out of which ran enormous electricity cables. I was good at getting engineers and other technical people to tell me about their skills, so I gathered we could measure the electricity going through the cables by clamping an Electronic Monitoring Device onto the cables. The device would measure at any intervals we chose – we could see what the demand was from a print out. The clamps would go on any machine, so we could learn something about anything we chose. I was allowed to rent the equipment for a whole month (think of it – a whole month!) We started at the Load Shedding Equipment, intending to work our way down the processes until the month ran out.
Now we need a short educational excursion into the niceties of industrial electricity tariffs. And the economics of copper. It works like this.
Our plant is in the Thames Valley. That’s a long way from the Nottinghamshire coalfield, where the electricity is generated (or so we were told). The point is that to get the electricity to the factory you need a cable, Copper, expensive. And its diameter has to be large enough to carry the MAXIMUM EXPECTED LOAD of electricity that the plant will demand. Put too much down the wire, and like any other, it will melt.
The Electricity Company has to pay for the cable. So to get its money back, and reduce the amount it has to invest, it arranges the electricity tariff so that the base load is at a “normal” price, but higher amounts of demand (more kilowatts) come at very high prices. So the demand is price – sliced. Use more than a certain level and you go onto a much more costly price per unit used.
To counter this, the customer installs Load Shedding Equipment. Its fairly simple. It measures demand at the plant, and when it gets above a certain level, it shuts off certain items in the plant. Cuts the consumption, keeps the costs down. Ours was a wall – full of mechanical devices, like solenoids, complete with switches and sparks and dust. It was very dark. No one knew how it worked, it had always been there, and set that way.
Now a small further digression to the Social History of the Plant. This had many facets and was intriguing, but only part of it can detain us here. The firm was part of a large international group. It was Group Policy to use vending machines for all staff drinks. After all, the Group made the machines, and they needed a market. And so they were installed. The flavour of the drinks produced did not meet with favour (yes, you read that right), so despite an official ban, the office staff brought in kettles and arranged unofficial commissariats.
Yes, you guessed it. When the office staff, several hundred of them, came in each morning at 9.00, they all started the day with a hot drink. The Load Shedding Equipment sensed the increase in the total electricity load, and started shutting down the major items of plant. Including the furnaces in the Strip Shops. So (I suppose) we made bad quality for a bit, until the temperatures came back onto tolerance. Actually, I never proved that bit, because quite smartly we re-programmed the Load Shedding.
And not too long after, I was made redundant, along with 400 other poor souls. The plant went from 2000 to 1600 heads at that round of redundancies. And a few years later it was closed completely. Still no measuring instruments or costing systems of course. Just cut, cut, cut. The Finance Director of the Plant went onto the Group Board of the Holding Company for his exploits. Attaboy. The rest of us went onto the street.
So, if you run a factory, remember it’s the not just the technology, its also the personnel policies which determine its profitability – and indeed its survival.
And, why don’t we have factories? Yep, it’s the coffee breaks. And the tea machines. But remember, never the FD !
Modelling
Just a couple of tales to give you some flavour.
For about three decades I have been able to write models which produce forecasts for the Profit and Loss Account, Cash, and a Balance Sheet. As one integrated calculation. In the early days I did it by hand or used batch processing on mainframes, but a spreadsheet is a better tool, and I have only really been able to do this in a detailed automated way since PC’s got big enough to cope with the file sizes required. That’s about two decades. These models are very handy for budgeting, forecasting, evaluating alternatives, forecasting cash and borrowing requirements, and so forth. MD’s feel much more comfortable knowing where they are going. Alternatives can be examined, and the answers to short-term questions like "are we going to make budget this year?", and longer-term ones like "if we want profits to grow to X, and ROI to Y, what do we have to do?", worked out reasonably swiftly.
Tale the First.
I can be frank / open about this one. Amazon had hired a very expensive consultant to create a Financial Forecasting model. The requirement was to assess alternatives for the company's expansion into Europe (which essentially, in those days, had to be country by country). The result was a thing of beauty. It was macro – driven and had bells, whistles, little sliding indicators for adjusting the elasticity of demand, and quite the slickest interface I have ever seen. It really did look good. But it was not a joy for ever.
The first thing was that its creator, probably a wise person, had gone onto do other consulting things. There were no systems or user notes. The model was not documented. Slick it was certainly - you could play with it and get results out, but it was not hard to see that they were wrong. One of those times when you got information which was not just wrong – it was positively misleading.
I dealt with this by starting again. Keeping it simple, and writing so that every calculation could be traced through and hand-checked. And whenever it was deemed necessary to do something complex, I checked with the users to see if they understood it, wrote out some User Notes (the documentation was part of the model) and then implemented it. So there would be utility for the client even if I were not there. All the inputs were grouped together and printed out on one Assumptions sheet, and all the outputs were summarised in a single format. It may have looked relatively rustic, but did the job.
Tale the second
This one shall be nameless, to protect the guilty. The firm should have been a world-class business in electronics. It could have competed with the likes of Hewlett Packard at the high- tech end. It produced a very sexy and impressive black box which used some Very Hi-tech technology to – but, ….. but that would lift the veil, wouldn’t it? We said we were going to protect these people.
Aside from this tale, the firm’s holding company had become a stock market vehicle for some very wily operators. Not managers. Not inventors. City Operators. They set the background demands of growth, pressure for results and, let us be frank, panic and mistrust.
The electronics had an unusual pricing structure, which meant that margins declined in step – values, on big repetitive orders. The firm largely manufactured the product itself, it did not buy in, so, to be fair, it was not easy to get a “feel” for whether the Gross Margin number was right or wrong. On an individual item margins could be 80% or 10%, depending on the order volume and the components mix. I was only an Interim there, it was a Systems Recovery Management Project, sorting out the usual things you find in fast growth high tech firms. Administrative tail unable to keep up with sales driven head, and eventually a complete mess results. People are blamed, then terminated, careers marred, etc. One of the first things I had done was point out the margin problem, but with the state of the market there were no really quick solutions.
The MD, call him Bill, was a software addict – he just loved his toys. He would go to fairs and come back with armfuls of the latest releases of every Desktop product which was available. He was very capable with software generally, and reasonably good with spreadsheets. But he was a sales person and entrepreneur, not a diligent accountant.
Next year’s budget was required. I started a financial forecasting model in my usual format, as outlined in the first paragraph above. The MD was asked for some assumptions, shown what I was about in the model, and (not at all an uncommon reaction this) said “Wow, so that‘s what one can do” and took the embryo model over to work on himself. I had his accounts department to sort so I was quite pleased to Not have more to do. In due course the MD presented his own forecast. I cleaned up the accounts department and left the firm.
The City Operators had their PR day and the share price of the firm went up. And then it went down. In due course I met people and enquired how the super Hi-tech product was doing. And how was Bill? Digging into it a bit, it seemed Bill had made a simple mistake. He had added a line of cost to the Direct Costs, but failed to adjust the “SUM Range” calculated in order to get the Gross Margin. The margin was not something one could have “feel “ for and no one else checked. ( I have always puzzled as to why the self – checking elements I build into my models were circumvented, but that too must have been done). So Bill, MD and profit-responsible, had missed his budget by quite a lot. The Operators were not having that of course, so they and Bill parted company. The Operators hadn’t a clue what to do with the Hi-Tech product, so it failed. Another potential British Success Story ending in ignominy. And all because the financial forecast was not checked out by hand.
So, as a policy, (and not JUST because of these experiences, but certainly influenced by them), when doing Modelling, for any purpose, I don’t use Macro’s. I do print out everything, at least at the testing and proving stage, and I do use a calculator. Slow, boring, frustrating. But it gets the right results.
Just a couple of tales to give you some flavour.
For about three decades I have been able to write models which produce forecasts for the Profit and Loss Account, Cash, and a Balance Sheet. As one integrated calculation. In the early days I did it by hand or used batch processing on mainframes, but a spreadsheet is a better tool, and I have only really been able to do this in a detailed automated way since PC’s got big enough to cope with the file sizes required. That’s about two decades. These models are very handy for budgeting, forecasting, evaluating alternatives, forecasting cash and borrowing requirements, and so forth. MD’s feel much more comfortable knowing where they are going. Alternatives can be examined, and the answers to short-term questions like "are we going to make budget this year?", and longer-term ones like "if we want profits to grow to X, and ROI to Y, what do we have to do?", worked out reasonably swiftly.
Tale the First.
I can be frank / open about this one. Amazon had hired a very expensive consultant to create a Financial Forecasting model. The requirement was to assess alternatives for the company's expansion into Europe (which essentially, in those days, had to be country by country). The result was a thing of beauty. It was macro – driven and had bells, whistles, little sliding indicators for adjusting the elasticity of demand, and quite the slickest interface I have ever seen. It really did look good. But it was not a joy for ever.
The first thing was that its creator, probably a wise person, had gone onto do other consulting things. There were no systems or user notes. The model was not documented. Slick it was certainly - you could play with it and get results out, but it was not hard to see that they were wrong. One of those times when you got information which was not just wrong – it was positively misleading.
I dealt with this by starting again. Keeping it simple, and writing so that every calculation could be traced through and hand-checked. And whenever it was deemed necessary to do something complex, I checked with the users to see if they understood it, wrote out some User Notes (the documentation was part of the model) and then implemented it. So there would be utility for the client even if I were not there. All the inputs were grouped together and printed out on one Assumptions sheet, and all the outputs were summarised in a single format. It may have looked relatively rustic, but did the job.
Tale the second
This one shall be nameless, to protect the guilty. The firm should have been a world-class business in electronics. It could have competed with the likes of Hewlett Packard at the high- tech end. It produced a very sexy and impressive black box which used some Very Hi-tech technology to – but, ….. but that would lift the veil, wouldn’t it? We said we were going to protect these people.
Aside from this tale, the firm’s holding company had become a stock market vehicle for some very wily operators. Not managers. Not inventors. City Operators. They set the background demands of growth, pressure for results and, let us be frank, panic and mistrust.
The electronics had an unusual pricing structure, which meant that margins declined in step – values, on big repetitive orders. The firm largely manufactured the product itself, it did not buy in, so, to be fair, it was not easy to get a “feel” for whether the Gross Margin number was right or wrong. On an individual item margins could be 80% or 10%, depending on the order volume and the components mix. I was only an Interim there, it was a Systems Recovery Management Project, sorting out the usual things you find in fast growth high tech firms. Administrative tail unable to keep up with sales driven head, and eventually a complete mess results. People are blamed, then terminated, careers marred, etc. One of the first things I had done was point out the margin problem, but with the state of the market there were no really quick solutions.
The MD, call him Bill, was a software addict – he just loved his toys. He would go to fairs and come back with armfuls of the latest releases of every Desktop product which was available. He was very capable with software generally, and reasonably good with spreadsheets. But he was a sales person and entrepreneur, not a diligent accountant.
Next year’s budget was required. I started a financial forecasting model in my usual format, as outlined in the first paragraph above. The MD was asked for some assumptions, shown what I was about in the model, and (not at all an uncommon reaction this) said “Wow, so that‘s what one can do” and took the embryo model over to work on himself. I had his accounts department to sort so I was quite pleased to Not have more to do. In due course the MD presented his own forecast. I cleaned up the accounts department and left the firm.
The City Operators had their PR day and the share price of the firm went up. And then it went down. In due course I met people and enquired how the super Hi-tech product was doing. And how was Bill? Digging into it a bit, it seemed Bill had made a simple mistake. He had added a line of cost to the Direct Costs, but failed to adjust the “SUM Range” calculated in order to get the Gross Margin. The margin was not something one could have “feel “ for and no one else checked. ( I have always puzzled as to why the self – checking elements I build into my models were circumvented, but that too must have been done). So Bill, MD and profit-responsible, had missed his budget by quite a lot. The Operators were not having that of course, so they and Bill parted company. The Operators hadn’t a clue what to do with the Hi-Tech product, so it failed. Another potential British Success Story ending in ignominy. And all because the financial forecast was not checked out by hand.
So, as a policy, (and not JUST because of these experiences, but certainly influenced by them), when doing Modelling, for any purpose, I don’t use Macro’s. I do print out everything, at least at the testing and proving stage, and I do use a calculator. Slow, boring, frustrating. But it gets the right results.