Colin Devroe

Reverse Engineer. Blogger.

Do sanity checks on your reporting

December 5, 2011

In my extremely limited experience Board meetings are generally prepared for hours or minutes before they’re held. The vast majority of the information may be collected a few days prior but a lot of little tweaks are done just before game time.

This is usually for good reason. The leadership team of the company that are responsible for reporting to the Board are typically “heads down” working very hard on moving their company forward and reporting to the Board a bunch of financial data is the last thing on their mind for much of the quarter. But these Board meetings are not only beneficial in one direction — they also provide the heads of the company a time to take a good look at their financials and do some thinking on their own. Without the deadline of a Board meeting looming this would be done less and less often and that could lead to big problems should small problems not be caught early enough.

Fred Wilson’s MBA Monday series of posts today had one on calculating Burn Rate (the amount of money a company is purging without recuperating it) and in it he says that, as a Board, they’ll do sanity checks on the data reported by the company to be sure everything adds up.

“Whenever I get a version of this more sophisticated calculation of burn rate, I always do a sanity check by comparing to the “back of the envelope” method just to be sure they are in the same ballpark.”

These sanity checks are a good thing for the company to do beforehand so that the Board doesn’t need to call you out on it. I’ve seen this happen many times. We’ve reported numbers that we thought were just fine only to find out something simply did not add up. Partially because the people that were putting together the numbers were staring at these numbers for hours and hours at a time. Sometimes things can begin to get fuzzy. That is why these “back of the envelope” sanity checks that Wilson suggest are so vital. They are simple calculations that can be done just to be sure the other, more complex, calculations are even close. This will save you a lot of time and embarrassment.

As a side note, I’ve never been envious of being the person responsible for putting all of this data together. I’ve never been tasked with that responsibility and I’m glad for it. But I think it is an excellent exercise for anyone in the company to have a crack at running through the numbers and pulling your hair out a bit while doing it. You’ll learn a lot.