- How much should you have in cash reserves? In standard
One of the commands we are working on with my dog is “Leave it.” The other day I was taking her for a walk and a rabbit ran right in front of us, and as soon as I said “Leave it,” she wanted to chase it– quite the opposite of my well-intentioned command.
Ironically, I had this dog-training-flashback as I was looking at an analysis that was presented to me. All I could think was that this person had “gone down the rabbit hole.” It’s an Alice In Wonderland reference we use when someone chases details (the Rabbit) to the point of absurdity (Wonderland). And I wish I had caught that person before they chased the rabbit and told them to just “Leave it.”
That person’s intentions were good, and she felt like she was doing the right thing finding a solution to the error she discovered. I was frustrated because I could have saved her a lot of time and effort had I known about the issue before she started working on it.
Did everything tie out in the end? Yes.
Ultimately did it matter? Unfortunately, no.
This is a common complaint I also hear from clients. They’ll say that their accounting team can’t see the forest through the trees, or that they are mired in the details, or they just can’t let something go until they get everything to balance to the last penny. And while that person beams with pride at how they worked through a solution, the business owner is exasperated by the wasted effort, because, frankly there are a million other things that owner would have liked to have been done instead.
Silently, like me, they wished they caught it earlier and said, “just leave it, PLEASE!”
It’s the concept called materiality. And sometimes it is really, really hard to get accounting people to grasp it.
When something is material, it sways the financials one way or another to a point that it is noticeable. Materiality is not always a certain dollar threshold. Sometimes it is a percentage of sales. Sometimes it is material in the effort needed to solve it.
As accounting folks, we like things to balance, we like things to tick and tie to the penny, and for heaven’s sake, everything needs to be in the right place for us to sleep at night. And while we feel we are doing the right thing, in the end, it may not make a difference to the top or bottom line at all… it’s not material.
It’s situations like my example above, or when your bookkeeper spends hours and hours trying to collect a $30 invoice, or when they spin their wheels because their bank reconciliation doesn’t tie, when you need to coach them on the concept of materiality.
So how do you help your staff understand what is material? Here are a few ways to try:
- Explain the boundaries: Every business’ materiality threshold is different. Sometimes clients use a percentage of sales, others use a dollar threshold. Whatever it is, give the team some guidance of what is an acceptable difference so they have permission (and a reference point) to move on.
- Give them tips to get their eye off the rabbit. Most accounting people are very focused. They get fixated on a problem and will work it to conclusion. Often times they get involved in their work and don’t look up to see that they are heading down the rabbit hole. Set a threshold of time for them. For example, if any new problem is taking them longer than 45 minutes, they need to come to you to get some guidance before they chase the rabbit too far.
- Show them the horizon. Sometimes we don’t do a good job of giving perspective to the accounting staff of where the company is going, or what is important to us, and, in the absence of such guidance, they often determine their own priorities. Show them the horizon, make sure they are clear on the company’s priorities and the role they have in executing that vision. This will help them to put perspective on the problems they are trying to solve and determine if, in fact, they are worth solving.
- Wash, rinse, repeat. Know this: understanding materiality is a process for your team. You need to course correct when needed and provide guidance consistently. Don’t give them a blanket order… not many accounting folks like that kind of ambiguity. Establish some controls or checkpoints so you and they are comfortable with non-material issues. There are things that should be tied to the penny (like your bank reconciliations) but many, many other things can be tested against the materiality threshold.
Having the materiality conversation often gives accounting folks perspective, but can also cause the owner concern that they are somehow giving permission for standards to slip. The best way to mitigate negative effects is communication. Have your accounting team approach you with the items they are going to write off, or issues
they will not pursue so you have buy-in and they have the affirmation they need to decide when something is not material. In the end, you’ll find that that they’ll be fewer rabbits being chased down holes.
How do you determine what is material in your business?