At a recent meeting of Chief Executive Boards International, a member voiced the concern that his company was getting into a cash bind, and he was getting worried. As the Board asked more questions about that, it turned out he didn't have a line of credit for his business. Incredible, in these days of 5% interest. It was just something he hadn't taken the time to set up. As the Board asked more questions, it turned out that he wasn't exactly sure why he was getting into a cash bind -- something to do with "a lot of inventory" and "some slow-paying customers", he thought (maybe).
As the Board drilled a little further into this, he said he really didn't have timely monthly financials he trusted. Bingo. At that moment he aligned himself with, in my own experience, the majority of small business owners who have financial statements that are late and lousy -- they're completely useless as tools to manage a business. At the worst, they're just wrong -- actually presenting a business owner with a mistaken picture of where he is.
Again, in my experience coaching business owners, the first thing we generally find is that the financials are lousy. Most owners pay attention to the things they know -- the core business -- and don't pay much attention to the financials because they don't themselves have a finance background. Generally, they use their financials once a year (or perhaps quarterly) to figure out how much to pay in taxes.
Another member at the table said, "You need to get that fixed immediately. My company is in serious financial trouble today because I didn't realize a year ago that my financial statements were faulty. I didn't realize that each month's apparent profit was offset by costs being charged to prior months that hadn't been closed. I thought I was recovering, and in fact I was digging a deeper hole."
Not having rock-solid, timely financials is like flying with no altimeter, no compass and no artificial horizon. The FAA won't allow that, and for good reason. Those pilots crash.
Yet another member said, "I very nearly sold my company into failure. I realized I was having financial problems that I didn't understand, and finally bit the bullet and hired an experienced CFO I couldn't afford -- for $80k. After a couple of days examining the books, she came in, wide-eyed, and asked, "Are you scared?" [Ed. note: I HATE it when a CFO gets wide-eyed] "She had discovered that by the time we shipped and paid for everything I'd sold, and the customers waited 45 days to pay us, we'd be out of cash. [Read: Game over] "Not having a CFO almost cost me my company."
He went on to say that with her help he survived that scare, and then his new CFO installed systems, controls, forecasting and disciplines that not only saved his company, but also were worth several times what he was paying her (in improved results). Thankfully, just in time before he became another small-business failure statistic -- road kill on the entrepreneurial highway.
So, we're hopeful the member who brought this up gets his financials shaped up into the decision-making tools they're supposed to be. And that the member in trouble because of lousy financials caught it in time to recover. And we're thankful to a member who once again reminded us that failure to fully understand the company's financials is one of the top 3 causes of small business failure. He was standing at the edge of a financial cliff without realizing it, and when he looked down he didn't like what he saw.
Most business owners imagine that their CPA "would let me know if something was wrong." That's an unrealistic expectation for at least two reasons. First, although there are a lot of exceptions, most CPAs do not have CFO experience. They report the news, they don't forecast or shape the news. Secondly, it's generally not their job, as they perceive it. If you hire them to prepare monthly statements and do your taxes, they actually believe you're going to read (and understand) the monthly statements and that the data you gave them to prepare them was accurate. It's like wondering why the scorekeeper at a football game didn't call better plays.
If you've had an awakening to the need for better and more timely financial statements, or the need to hire either a part-time or full time CFO, please click "Comments" below and share your experience and knowledge with others.
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Terry Weaver
CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
Well written article. Thanks for sharing. We have found the same issues with most of the small to medium-sized businesses that we meet. Timely and accurate financial statements are the foundation, and then so much more can be done to help the business from there!
ReplyDeleteInteresting how often some version of this story occurs. Your members might also like the Newsday article "Assessing risk in a small business" that I reference on my blog, with my contribution.
ReplyDeleteThe article to which Gary refers can be found at: http://www.newsday.com/business/ny-bzherz0912422136feb09,0,6518945.story?
ReplyDeleteA very good article and it explains how the SMEs are not able to optimize their value by utilizing the services of an in-house or outsourced CFO services. Their belief that the services of CFO comes with a high cost is a myth.
ReplyDeleteI like this article -- it truly goes to show that success comes from doing what you Know and are great at -- the experience of designated accountants is invaluable within any business especially smaller oraniztions.
ReplyDeleteTracy Gerlitz
As an Experienced Accounting Professional, i find this is a common problem with most of the owners, especially of small business. Sometime this costs them their business or lose an opportunity to grow and expand.
ReplyDeleterajan
Great article. I understand that finances aren't always second nature to business owners, and that is why it is so important to know where your weaknesses are and employ people that can help. Your CFO should be a business partner and feel free to tell you their opinion freely. It's up to you if you want to move forward with their recommendations.
ReplyDeleteOwners of many many small and medium sized businesses lack the tools to better manage the business. Budgets, Cash Forecasts, metrics to help them understand and drive improvement. Often they don't have the experience to identify what lies behind unfavorable trends and fail to take the necessary actions. The proliferation of software such as QuickBooks in the hands of bookkeepers who lack the experience to interpret results, or who generate Cash Basis financial reports (okay for small company tax purposes but provides zero management visibility) produces almost meaningless results.
ReplyDeleteI have an acquaintance who was self employed and made six figures a year; it was a one person operation. The accounting was almost non-existent and she actually ended up in debt and owing the IRS big time. I'm not saying she needed a CFO but some financial help would have helped. Let alone small businesses with a lot of inventory etc. Some times you need to delegate tasks like setting up lines of credit to someone qualified (like a cfo) so you can focus on running your own business.
ReplyDelete