--Because governments ask us to report at year’s end for the purpose of assessing taxes;--Because shareholders want a report on their investment to determine their income, and the government assesses their taxes too; --Because each employee must report wages and their use of benefits at the end of each year, again for the purposes of assessing taxes; --Because the employer must provide supporting documentation for all this; --Because, culturally, we mark days and ends of years, and tell our stories, accordingly; --And because, frankly, we gravitate toward mental shortcuts to make sense of things, even if it handicaps our problem-solving ability…
…we tend to collapse into managing enterprise and personal affairs with this same annual time frame in mind. Most of the above are government-mandated busy work exercises, and worse, bad habit reinforcements when it comes to running an enterprise. They leave you and I living and thinking inside an arbitrarily constructed time frame, making decisions as if year ends somehow matter disproportionately more than other days.
This is a problem. A besetting sin. A hazard.
Accrual accounting provides some possibility to think differently than solely in twelve month/annual increments. The tax code does also, allowing for appreciation and depreciation over multiple years. But, unless you: 1. Develop your own reports according to your own, more useful timeframes , with the information you’ve learned through trial and error, and 2. Use these reports to project forward rather than solely documenting previous actions, You will only be responding to what others want to know, using their non-related information to inaccurately evaluate your stewardship.
Does this poke at you? It should! For just one example, consider how the information needed for decision making improves if you use a trailing 12-month income report, matched with a projection of the next twelve, rather than a year-to-date report in comparison to the previous year. The first gives you real time information in relationship to the future. It also helps you to note up or down trends immediately, rather than long after you’ve failed to correct a problem or seize an opportunity. The second looks backward only, telling you only how you did with nothing at all about your prospects.
Is this kind of information available for your management teams, for your board, for your investors? It should be, not just because it is more accurate and contextualized to your business, but because it helps to set an organization’s culture. It becomes a culture of foresight and wise adjustments, rather than ignorance, reactions after the fact, and searching for someone to blame.