Leaky Ships: Process Costs and Financial Reports That Don’t Add Up

Struggling with my ability to communicate with financial professionals about why and how process problems and inefficiencies their Income Statements and financial reports, a very large Leaky Ship making its way to Port (goals and objectives) popped in my mind.

Business owners and their financial advisors (CPAs, Accountants, Bankers and Consultants) often report that

“Financial Reports do not match Reality”. Yes, they do, and it’s pretty simple: those leaks (issues, problems and inefficiencies) let water in and fuel out.

Guess what! No one seems to notice as the fuel is leaking into a great body of water, an ocean or sea.  The small water leaks, one by one as the ocean water comes in, are not noticed until there is a pool.  The leaks are “patched” and the reason for the pool not addressed.  The pool is mopped up and water dumped overboard, only to leak in again at the same or different spot, caused by the same root cause.

In many businesses, the ship sinks before it arrives at the Port (goal and objective).  In other cases, it bobs up and down on the ocean as storms roll in, with barely any fair weather ahead. The ship loses cargo and crew and can’t replace them.  The owner exits not knowing what really happened to his/her company and life’s work, getting dimes on the dollar for their life achievement, or worse yet the business is no more.

Seems simple but then why do business leaders and their advisors not want to look at day to day processes and assess them for their “sea legs” and ability to “weather the storm”.  What stops them from taking the time to assess the cost of leaks on financial reports?

Reflecting on this analogy (the Leaky Ship), the metaphysical meaning of the Sea/ Ocean and Ship flashed.  The Sea/ Ocean represents the subconscious or unconscious. The ship is an enclosure much like a house or home and represents the consciousness.  Those small leaks of water or fuel pass in from and out to the subconscious, which is often what we experience in businesses.  People understand these “small little leaks” are happening but they slip into the subconscious of daily business life (of getting product out the door to meet demand and on time delivery) and the busyness this battle creates. That is until the problem becomes too big to ignore.  A fire drill is called and problem fixed but not resolved with a sustaining long-term solution.

(In this sense, a lot has been written about consciousness, the subconscious, and the modern human psyche, and it all connects to this Leaky Ship problem. I refer the reader to Carl G Jung, a  philosopher, historian, and much better psychologist than Sigmund Freud).

It takes a strong, self-aware leader to consider their Ship and understand their processes and Leaks, including how they impact COGs and financial Reports.  Self-awareness is a disappearing trait in modern man/ woman and not for the faint of heart.

Of course, there is a simple way to find and understand your processes and “Leaks” in your “Ship”.  It involves process mapping, assessment and cost accounting, and is easily and simply performed.

Process mapping entails following material and information flow from Customer sales order to delivery and service. First hand observation and interviews are used to capture actual processes, issues and opportunities and solutions or improvements.  Costs associated with problems and inefficiency are typically assigned to overhead and administration, when they should be attributed to COGs. Erroneous data is incorporated into financial reports resulting in inaccurate COGs and margins.  Using process mapping and costing, accurate COGs and margins can be calculated and financial reports improved. Most importantly, a plan can be created to improve financial performance based on ranking solutions identified in process mapping.   Learn More

In a recent presentation by Paul Menig to financial professionals, he asked if attendees had heard of 5 Why, a decades old issues/ problem-solving tool.  Few had heard of such a thing.

As the storms build yet again for what appears to be another challenging year, it is time to assess your ship, its leaks and organization psyche so as to be able to advance full steam ahead with fair sailing.

Contact Debra Mervyn Debra@MervynGroup.com