Most Business Owners have little or no background in Finance which puts them at a disadvantage to knowing what an excellent Finance team should be doing to help the business to be successful and meet best practices. They also don’t realize that, even for small businesses, that an excellent Finance Team is affordable. With that in mind, I have developed an in-depth Finance Health Check for businesses where I report your score and provide recommendations on how to improve on it. More on this Finance Health Check and some sample questions at the end of this article.
Typical Year End Experience
For most small businesses, a bookkeeper does all of the data entry and produces customer invoices, cheques and may produce an income statement with a single column of numbers. The income or loss at the bottom of that income statement often fluctuates wildly from month to month. At the end of the year, the records are provided to the company’s external accountants, who after a few months, produce Financial Statements that are very different from the statements your bookkeeper produced at year-end. They also provide a long list of journal entries for your bookkeeper to enter into your system in order to make it agree with the statements that your external accountant produced. Business Owners finally get to see how they really did last year, four to six months after the year end, which is too late to impact results.
Sadly, this scenario plays itself out year after year for thousands of small businesses. To avoid this from happening, more and more businesses are turning to an affordable option of an outsourced finance controller / CFO.
Let’s look deeper into why this issue is happening and what other problems are happening right under the noses of most Business Owners.
Your Accounting Records aren’t as Accurate as you think
A survey of Business Owners in 2018 by Clutch stated that 95% of small Business Owners in the US believe their financial records are accurate. However, experts think otherwise.
Do your monthly financial statements fluctuate a lot from month to month. Does your business make a large profit one month and then a large loss the next? Some of the common errors include not matching cost of goods sold to the corresponding revenue in the same month, and expensing items that should be expensed over time like prepaid insurance or purchase of equipment. Often loan payments are not recorded properly between interest and principal, depreciation and corporate taxes not recorded at all and inter-company accounts often don’t agree with each other. The list goes on.
When the external accountant receives the records after the year end, they usually find that the books are riddled with errors. This is why the financial statements that the external accountants produce are so different than ones provided to them. All of these errors need to be corrected.
The problem with this is that either the Business Owner relied on incorrect information during the year when making decisions or the Business Owner knew they couldn’t rely on them and therefore made decisions in the dark. Since the above survey shows that 95% of them think they are accurate, they probably relied on inaccurate information.
This isn’t always your Bookkeeper’s fault. Even the good Bookkeepers aren’t Accountants and can’t be expected to know how to properly produce accurate financial statements. Their training is in the operation of the accounting software, entering the data to track expenditures and reconciling to bank statements. They are not trained in the various accounting principles, how to do analysis and make recommendations that will help Business Owners make good decisions.
To solve this problem, you should have a Part-time Controller that is qualified and follows an approved process as part of your Finance Team. That Controller will go over your financial information each month and make the appropriate entries to produce correct financial statements. This will make a world of difference for the Business Owner and you will receive accurate information on the performance of the company and be able to make knowledgeable decisions that will impact the future performance of the company. Your assigned Controller can also prepare the working papers at year-end so that your external accountant will have what they need, making it easier for them.
Profit is not the same as Cash Flow
As you already know, cash is the life blood of your businesses. Unfortunately, the Income Statement does not show how well a company is doing with its cash flow. Most Business Owners look at their bank account balance, and if their business operates at a similar level year after year, they might have an idea of how the business is doing cash wise. However, if you have a seasonal business, you likely have a hard time knowing if your business will make it through the slow time. If your business is growing quickly, you likely don’t know when you will run out of cash.
This is where an up-to-date cash flow forecast can make a big difference for Business Owners so that future cash needs are known ahead of time and they can rest assure that the business will have the cash it needs as it grows and as it goes through the off season. Businesses are much more likely to survive when forecasting is done.
To solve this problem, a Part-time CFO can create and update your cash flow forecast so that you will know your financing needs and can have peace of mind. This Part-time CFO will also help you manage your cash better. Ask if they have a step by step process for improving cash flow and collecting from your customers faster.
Not knowing where the company is losing money
Many business owners don’t know where their business is making a good profit and where it isn’t. No analysis is done regularly on the profitability by project or product / service or customer. Without this knowledge, you can’t make decisions that will increase the profitability of the business. You could be putting more time and effort into the areas that providing the highest returns and likely make as much or more as you are now with less effort and aggravation.
This is where a Part-time CFO can provide this analysis for you with recommendations on what steps you should be taken to improve the profitability of your business. It may include increasing prices, dropping certain product lines and firing some customers. It has worked for us and it can work for your business.
Not keeping an eye on the Business’ Financial Health
It is very important to produce timely monthly financial statements and review them, understanding why there are unusual items and variances to the previous year and budget. The more closely you monitor financial activities, the faster you will pick up on issues as they develop. In this way, adjustments can be made immediately to make the needed changes to get back on track so that results end up where you want them to be by the end of the year.
Keep in mind that your business is an investment and you need to think of it that way. Ideally, you should know the estimated value of your business and take steps to increase its value. There is much you can do to increase your business’ value besides increasing profits. Our Business Health Check comes up with the estimated value and makes recommendations to increase its value.
I find that many small Business Owners don’t review monthly financial statements. I’m not sure why that is. It could be because they don’t know how to interpret them which is difficult to do when it only shows a single column of numbers and they haven’t taken a course on how to read them. (ask about our Finance for the Non-Financial Leader course) It could be because they think that the statements aren’t accurate, when they likely are not, as we learned earlier. Or maybe they are just too busy working IN their business and haven’t blocked time to work ON their business.
When we create financial forecasts for companies, we forecast the Balance Sheet as well as the Income Statement so that plans can be made to make the Balance Sheet healthier over time. This results in the company surviving through the tough times and getting any needed financing for growth.
Conclusion
If you can relate to the problems we have outlined above, then I suggest that you contact me to find out your Finance Health Score and discuss how we can be part of or your whole Finance Team. Working with us will provide the following benefits:
- Clear, accurate and understandable financial reporting for the shareholders and management
- Tracking and improvement of Key Performance Indicators that drive improved business results
- Management that understands what needs to be done to reach goals
- Improved profitability and increased shareholder value
- Sleep comfortably at night because you know your cash needs will be met
- The company becomes less reliant on the owners
- You get a Finance Strategic Partner to be part of your Leadership Team to help grow the business and meet your goals
As promised, here is a sample of our Finance Health Check. See how well you are doing.
1.Are accurate, monthly financial statements produced on a timely basis each month?
5.Are profitability by customer / product / project reports created regularly?
10.Does the owner know the approximated value of the business?
11.Is the Owner taking steps monthly to increase the value of the business?
21.Is there a rolling cash flow forecast updated at least quarterly?
30.Are customers contacted monthly about older invoices and are quality notes being kept and accessible by leadership?
47.Are payment made more than a month ahead recorded as a prepaid?
51.Are capital expenditures assessed ahead of purchase for meeting minimum internal rate of return?
53.Is HST / GST calculations done correctly and filings done on time?
67.Are there payment schedules for every debt that breaks out interest and principle in every payment?
68.Are bank covenants calculated and tracked monthly?
87.Is there segregation of duties to initiate, approve, undertake and review the same transaction to help prevent fraud?
Contact us today to get your in-depth Finance Health Check and arrange a meeting to start the conversation. 226-791-0374 kevin@copiousinsights.com
By Kevin Ballantyne, BBA, CBEC®, CPA, CA, President of Copious Insights Inc.