What Your Accounting Dept. Can’t Tell You
When your company changes, your internal financial management has to keep pace. Red flags in the accounting department may be signaling a skills gap or they could be indicating a lagging, bloated or overwhelmed financial reporting and tracking system. The expertise to make specific fixes may be outside the wheelhouse of your in-house financial talent. Here are a few ways to know when you need virtual CFO services and why it’s so imperative.
- Financial Reporting is Not Timely or Accurate – If you are reviewing the numbers one month or more in arrears, your accounting department is lagging, and under such duress, the financial reporting system itself may be faltering. Falling behind on the numbers not only impacts management’s decision-making but adds undue stress and productivity drain, impeding strategic development. A CEO needs timely and accurate information to make timely and accurate decisions.
- Your Company Needs Experience in Working with Bankers, Lawyers and CPA Firms – Few things are more expensive than inexperience. You don’t know what you don’t know. Navigating the complexities of business and plethora of professional services requires a deep knowledge of the systems and scenarios that are unfolding in and around your company. A skilled CFO is an advocate, analyst and advisor who anticipates and translates the best course of action with your banker, lawyers, accountants and other professional service providers.
- Your Banker Urges You To Strengthen Internal Financial Talent – If, as a CEO you find yourself complaining to your banker that your accounting department is not delivering, a banker invested in your success will urge you to make some internal changes. He may recommend a stronger accountant, but many accountants don’t have the necessary skills. An interim CFO or in-house CFO may be the precise solution for streamlining and improving the accounting department.
- You Company is Undershooting Its Potential – When financial reporting is bloated or faulty it requires enormous time and energy from the CEO to review and interpret the numbers. This diverts his or her focus away from growing sales, which is where the energy is needed. A good interim CFO frees the CEO from minutia to focus on creating company growth.
- Your Growth is Internal and Your Accounting Department Can’t Keep Up – Often a financial reporting system needs a tweak instead of an overhaul. A good interim CFO knows where to streamline the financial management process to keep the accounting department on track.
- Your company is poised to acquire another company but you don’t have anyone with the requisite background to perform the due diligence. In this scenario knowledge is power, experience is paramount and the success of the acquisition hinges on specific expertise. Acquisitions are both an art and a science founded on the ability to know, use and analyze the numbers.
- You have a great opportunity to grow the business, but your team lacks the capabilities to manage the numbers. Driving profitability and growth requires swift and accurate financial management. The current team may be unable to define and put in place key productivity ratios and financial ratios, and accurately track and report on the trending, leaving the CEO without a clear view of what is required to navigate the company’s future.
- A Sounding Board and Strategic Partner- As a CEO it is lonely at the top. Leaders face serious responsibilities when pursuing their company’s next steps. Having a sounding board and strategic partner is not only advantageous, it is optimal. According to Nicholas A. Christakis, MD, PhD and James H. Fowler, PhD, authors of Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives, “Innovation rarely arises without the input of others. Breakthroughs are created in collaborative circles.” A skilled CFO can bring a fresh perspective to the table and strategize with you and your key managers on how to drive the business forward.
If your company is experiencing any of these scenarios, I welcome the opportunity to discuss them with you. Please feel free to call me at: 630-269-7646 or email me at email@example.com
Poorly structured financial reports stymie a company’s forward movement, but there exist steps CEOs can take to fix the problem.
In my last blog, I noted some 80 percent of small and medium-sized companies are hamstrung by poor financial reporting. If you are the CEO of a company suffering from this problem, I urge you immediately take the step of convening a very serious meeting with your in-house or outside accountant.
As a CEO, you may not know exactly how to classify revenues. But you do know that understanding how much revenue is coming from each of your product lines is imperative. Convey that objective to your accountant. It may require your in-house accountant work with your outside accountant to restructure the chart of accounts used to code and classify transactions in the financial statements.
Once you’ve gone this far in segregating revenue streams, you will next want to learn the gross profit associated with each of those streams. This will help determine which revenue streams should be given additional effort and capital to make them even more robust, or if entirely new streams should be launched.
In addition, you must discuss with your accountants the proper classifications of expenditures. This decision will help determine what direct costs are associated with generating each revenue stream, and what overhead costs exit.
Once you as CEO understand what you are hearing from your internal and external accountants, you will better understand where all this time and effort is headed. It is headed toward creating a vastly improved reporting system, with the objective of using it to make better-informed decisions.
I’ve seen some CEOs react with shock when presented with never-before-segregated revenue streams and their associated costs. “Oh my God!” they exclaim. “ I’ve got to eliminate some SKUs, some product lines. They’re just not profitable to continue selling.” Or, they may respond, “The margins on some of these SKUs are just so low that I will have to increase my prices.”
Now you can look into each stream, examine the number of items comprising each of those streams, and decide which SKUs don’t justify any additional sales effort.
What’s more, if you know you have a good product the marketplace clearly wants, you can make a better decision on adjusting its price.
It all comes down to better informed reporting. As CEO, you can now devote your energies to building profitable sales growth, and sleep better each night knowing your numbers make sense.
If you’d like to sleep better at night, get in touch. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
Misclassified expenses and un-segregated revenue streams result in poor financial reports that can halt a company’s progress in its tracks
It’s hard to make informed decisions about a company’s future based on poorly- structured financial reports. Yet many small to mid-sized companies rely on reports beset with serious problems. No wonder these firms aren’t growing.
One common problem with financial reports is that the reporting system is capturing a variety of product or service revenue streams in one account. Without those streams being segregated, the CEO doesn’t know what areas of the business are doing the best and worst jobs of generating critical revenues.
Another all-too-frequent issue is misclassification of expense categories into overhead, rather than cost of goods sold. As a result, companies get a read on gross profit and gross margin that is simply not accurate.
For example, if a company wants to launch a new marketing program, officers will attempt to determine how many additional sales the program will have to generate to justify its cost. If they don’t have an accurate read on gross margin, they will make a decision based on skewed sales numbers. That could result in the marketing program being over or under-funded.
These financial reporting issues are very prevalent, and are present in four out of every five companies I counsel. The problems exist for two reasons.
First, company officials don’t know how to distinguish between direct costs to produce sales and those line items that should go into the category called “overhead.” Second, despite their desire to place all transactions in the right categories, the companies do a poor job of coding, or classifying, transactions.
Unless the company addresses these reporting issues, the CEO will face the same problems month in and month out.
He or she must take a stance and rectify the reporting problems. If the CEO is smart, he’s going to say, “We have a direct cost of generating these sales dollars in overhead. They should be in cost of goods sold.”
The result of poor financial reporting is wasted time. The company wastes time pulling financial statements together, and again wastes time being forced to pull information out of the accounting system into a format that can be used. Precious hours and days that could be used to concentrate on building profitable sales growth go down the drain. In this case, wasted time truly is wasted money.
In the preceding paragraphs, I’ve discussed the surprising prevalence of poor financial reporting, and the negative outcomes that result. In my next blog, I will address steps chief executive officers can take to meet the problem head on.
You can’t fix a problem you can’t see
As discussed in my previous article, cash flow mismanagement is a common problem among small and mid-sized businesses. Many owners do not have the experience to precisely pinpoint where cash flow mismanagement has occurred, nor the background to develop plans designed to counter those cash flow issues.
Cash Flow Analysis and Financial Statements
A typical small or mid-sized business owner can spend hours examining his or her company’s financial statement, and nevertheless fail to see the underlying causes of cash flow problems, whether they be mismanagement of receivables, problems in pricing strategy, erosion of margins, escalating operational costs or other cash flow problems.
Reviewing the same financial statements, I will spot red flags in cash flow that to my eyes just about jump off the page. The experience I’ve gained as a high-ranking officer of corporate finance departments makes the errors almost instantly recognizable.
What’s more, having witnessed similar cash flow problems countless times in my years as an Interim CFO, I can not only pinpoint the problems, but expeditiously lay out a strategy the business owner can employ to help counter the cash flow quandary.
Of course, helping business owners recognize and overcome a cash flow management problem they are currently experiencing doesn’t necessarily help them down the line, when problems with cash flow are likely to crop up again.
Learn to Read for Cash Flow Issues in Financial Statements
That’s why I take the time to teach the business owners with whom I work how to accurately “read” their financial statements for potential cash flow red flags. I can show the owner I’m counseling what lies behind those numbers. Those business owners who are serious about understanding their own financial statements begin to have their eyes opened to cash flow threats. They come to more fully grasp what they should be looking for in financial statements as the enterprise evolves.
Build a Custom Financial Reporting Template
For many business owners, I also build customized templates specific to their individual businesses. Each template provides a schematic that enables critical figures to be pulled from the company’s financial statement and more carefully tracked over time. The template is a way of ensuring a current problem doesn’t become a recurring one.
Does your company have cash flow problems that would benefit from analysis? Put me to work and I’ll ensure your small cash flow problem doesn’t become a fatal one.