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Rodney's Ramblings: The Micawber Principle

..."Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."...

Rodney Gascoyne says that the principles expounded by Charles Dickens's character Mr Micawber are a philosophy by which we should all rule our lives.

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Charles Dickens created this wonderful character in his 1850 novel David Copperfield, together with the memorable quote above. In British pre-decimal currency, the difference between happiness and misery was a matter of pennies. Wilkins Micawber was a philosopher of sorts and may be one of Dickens’ most endearing and oft quoted creations. Based on his own father, who also spent time in debtors’ prison, he is best remembered as living his life with hopeful expectations, and in the end something does turn up

I was reminded, as I often am, of this wonderful character, recently, when asked to teach the basics of accountancy to a small group of young people, and their mentor. They had had no formal training on the subject, but had inherited work in their Not-For-Profit offices, taking up and following exactly what had been done before, using some basic features of Excel spreadsheets.

We started by reviewing what each were already doing, noting the common elements and where each might differ in some way. Except for one, they were only required to produce monthly figures of past expenditures and revenue, for their manager, who then relayed the figures to sponsors. The exception required the preparation of sheets whose design was specified by their major sponsor. In this last case there might be little opportunity for variations without prior agreement.
I used time to show how their spreadsheets could be modified to produce more automation, with the use of formulas, should that be acceptable to their manager and readers. Such changes could also allow them to do their work easier, faster and with built-in error checking. What they were already doing was typical of the accounts of many such organizations. We each prepared a template of this better method, tested it to see the correct use of formulas, and they saved it for possible future use.

Beyond this I wanted to stretch their imagination of what further could be done with these regular figures. Their sponsors also required their managers to submit annual budgets once a year in support of requests for future funding.
I suggested how these budgets could be prepared from past figures and other knowledge, built up on a monthly basis to arrive at the annual totals. This is more than many organizations prepare, when they simply use a single annual figure for each category based on experience. I then illustrated how monthly actuals they were reporting, could be compared to the cumulative budget figures at the end of each interim month, with analysis of any significant differences, or variances, to produce a better appreciation of current conditions, as well as providing a good base for estimating budgets in the future.

This financial management should permit their managers to have a greater feel for the progress they were making and to better allow active management of the future, as the year progressed. We discussed how the figures would be presented to make use of this intelligence.

There was then once further step that would improve this knowledge gained, but then better anticipate future performance, and hence a forward thinking ability to fully manage coming events. This includes prior identification of any approaching ‘cash’ problems, where revenue and reserves on hand might not be sufficient to meet expected expenditures, as they occurred, without special arrangements with their bankers. It could also forewarn the need for additional funding, well in advance, or needing to make management cuts to stay solvent and operational.

This cash flow ability and forecasting in detail, could be exercised each month as they progressed into the fiscal year, or if really required and necessary, projected into future years too to provide even better advanced warnings, and the need for tight, active management of the conduct of the charity.
This last step is achievable by preparing new forecasts each month, by varying the monthly based annual budget figures, together with intelligence from actual budget variances year to date, and any additional knowledge on past or future events, plus any anticipated changes in management choices for the future, from past analysis. This allows the avoidance of otherwise predictable problems as this process is revisited, to prepare a new forecast each month, compared to actuals the following month, instead of using the now outdated annual budget figures.

This extensive process is used by all sensible companies and organizations to properly manage their continuing performance, also allowing the opportunity to manage affairs to maximize profits and ensure the safeguarding of all assets. Major public or private bodies employ many dedicated staff, just to perform this to the highest level. Some also prepare a number of scenarios, to show the effect of differing actions or possible circumstances, to current problems, and the likely outcomes each way.

Finally, I suggested to them that all people and responsible entities should be taking these steps on a regular basis, otherwise they might fall into the problems that often caught up with Wilkins Micawber. It can be shown to be necessary for Governments too, at all levels, and that if the US, Europe and many others had been aware of the need to do this, and had done it properly, honestly and regularly, we need not be in the financial straights that are common around the world now, and caused the Global Financial Crisis just five years ago. It is equally the only sensible way to run family finances, as Micawber’s wife, children and boarders were continuously finding out, to their cost, throughout the book.

You might say that such principles are a philosophy by which we should all rule our lives, and influence those of our loved ones.


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