Last month I started a series offering various best practices and tips to address the many challenges
executives at health centers face.
This month, I’m going to write about a topic that is a major challenge to many executives: how to
improve the accuracy of monthly financial statements, and do it in a timely basis. Numerous clients over
the years have told me they either never receive monthly financial statements, relying on year end
audits, or they take two to three months to receive them and even then, the accuracy is questionable or
the usefulness is limited per the executives I’m speaking to.
I’ll start by saying that your organization should be generating accurate financial statements prepared in
accordance with generally accepted accounting principles (GAAP) on a monthly basis. I have had some
organizational senior leaders tell me that their financial leadership tell them it’s not possible to prepare
financial statements monthly. Not true, and that’s a red flag. There are many schools of thought as to
timeliness, but not too many different views as to whether it’s possible to generate GAAP-basis
financials on a monthly basis. It’s possible. Some organizations are able to generate their financial
statements within 5-10 days after month end and some take longer. Some take MUCH! longer. My rule
of thumb would be that in no circumstances should it take longer than 30 days after each month end to
generate monthly financial statements.
If you’re reading this and you are thinking, “We’re not getting financial statements out the door before
60 days. What is the disconnect?” Very simply, it’s leadership overseeing bad processes. Often times it
is due to the perception that all the work done at year end in order to close the books for a year end
close and for the independent audit needs to be done monthly, and therefore the conclusion is that it
takes too long. However, I would flip that around. As a practical approach, it is important to perform an
accurate monthly close process in order to generate the financial statements, and with a good monthly
process, the effort needed to perform the annual close is much less of an undertaking.
The quicker an organization needs its financial statements the more likely they will need to either have a
robust and accurate purchase order system or a strong system of recording estimated accruals.
If 25-30 days is an acceptable time frame, then the accounting department needs to choose a final day to
“cut off” each of the major accounting cycles: revenues and disbursements/payables. The primary
reason for the stated delay provided by accounting departments is receiving invoices with dates of
service related to the prior month.
A typical approach would be the following schedule if we use the 25 th as an example:
Some companies use cash basis for recording payroll, which is an inaccurate approach. Those 2-3
months per year where there are “3 payrolls” cause results to dip. Since most payroll is paid in arrears,
accruing payroll based on dates of the payroll period will fix these spikes in payroll expense.
How do companies generate financial statements with a quicker time frame than the above, for example
8 to 10 days? Most companies do not receive enough of their invoices from their vendors within a day
or two of month end in order to post accurate accruals. One approach is to use a purchase order (PO)
system that records accounts payable transactions and expenses based on their internal PO system. This
allows them to record expenses without waiting for invoicing. If they do not have a PO system, they are
simply using an estimated accrual system. They have studied trends and identified major expenses to
accrue and use an estimation process. This is quite an effective approach. Once past a learning curve, it
allows the team to issue materially accurate financial statements within a few days of month end. There
may be a need to keep the books open longer for year end in order to rely on hard data for the year end
close but it is an effective approach throughout the year.
In the next article, we will continue discussing the month end close by discussing tips for accurate
revenue recognition, which also impacts A/R.
What lessons are you taking away from these thoughts? I hope at the very least it is that a professional
approach to monthly financial statement production can help executives have the information they
need to run their health center effectively. Additionally, a second set of eyes can be immensely
Executives need information to run their health care organization. I talk to CEO’s all the time about their challenges, and I have put the broad challenges into the following categories simply to apply some framework:
I consistently get the following feedback: I don’t have the financial leadership support I need; I need information; the board needs to be educated about the complexities of our organization; I am not even comfortable that the monthly information is accurate; cash flow seems to be low; we frankly have no idea if the billing department is doing a good job; any financial surprises in the near future may cause some pretty big problems for us, but we don’t really know; the results from the annual audit don’t correlate with monthly data I receive and I have no idea why; we think we’re fine, and then the audit comes along and the results are remarkably worse; we receive offers to sign capitation contracts, and yet we don’t know how to evaluate them; and many, many more comments like that.
I think it’s possible for you to know what you don’t know. Over the next several months, I’m going to offer a series of articles to give some tips, feedback and pointers on several of the challenges you are facing. I’ll address topics such as board governance and education, strategic planning, financial reporting best practices, business office best practices, technology, billing and collections, financial management, contracting, evaluating lines of business, and cash management.
This month, I’m going to start with a topic that is a major challenge to many Chief Executive Officers (CEO’s): board oversight and education. This is a common challenge that I frequently encounter with organizations.
Board members are typically voluntary members, recruited to the health care center for various skill sets they may have. As a general rule, the board of directors is responsible for overseeing the planning and direction of the health center, oversight of legal and ethical compliance matters, and ensuring resources and plans are in place to have an effective operation. This latter component is especially accomplished by hiring the CEO to carry out the management of the organization.
CEO’s want their volunteer board members to better understand the business but time is tight during board meetings, and the business is complicated. So how to make the complicated simple in a short time is a big challenge. Certain members of the board may participate in certain subcommittees such as finance/audit, compliance, etc. Members of these committees will likely dive deeper into understanding keys to success.
I’ve found board members first need to understand the various components of the reporting package: the statement of financial position (balance sheet) and statement of activities & change in net assets (income statement & change in retained earnings), and statement of cash flows, along with the important metrics and line items to pay attention too. This being a broad article, I’ll not go into the details but I do find that I often need to explain in basic terms the basics of each statement, what they mean, differences between accounts receivable (A/R) and revenues, etc.
After a financial statement 101 training, the issues that cause the most complexity usually involve liquidity and working capital, revenues and their connectivity to visit and encounter activity, along with collections.
I’ll talk in a future article about managing revenue and A/R valuations, but board members need to understand the key drivers of success. As an aside, I’m often asked about industry benchmarking, which I do think is important, and is why I’m in process of rolling out some benchmarks for health care providers, but I also always emphasize that benchmarks need to be studied in context. It’s important for health centers to develop their own target metrics that will help them measure results compared to their goals. For example, I’ve seen certain health centers target certain metrics such as “days cash on hand” or “days sales in accounts receivable” in accordance with their strategic objectives, even when their targets varied from industry benchmarks.
Certain key drivers include knowing the health center’s cash position (days cash on hand), working capital, how long it takes for average claims to be paid, revenues by service line (in “total” and “per visit”) as well as visits/encounters by service line. I usually also advise reporting on monthly cash collections, as this will give you some correlation to revenues and A/R. Other important matters that make a difference in month to month results include number of days the organization was open for the reporting period. Number of clinic days can make a 5-10% swing in activity and revenues in any given month. Additionally, I think it is imperative for organizations to understand their margins by department and/or service line. Correlating with cash flow and financial results, it is important for boards to be educated on issues such as staffing, productivity, compliance matters. Of course, if the health center has incurred debt, it is imperative for the board to understand how the paydown of debt is impacting cash flows, along with the health center’s standing relative to any financial covenants in place.
When presenting to boards and committees, it will be important to assess the most effective way to convey these matters. I’ve found that charts and graphs help board members visualize the story being conveyed in the metrics. Members of the finance committee may want to see more details, and they may actually want to see “the numbers”.
I could go on and on about topics to cover in board meetings. Running a health center is a complicate venture. It takes time but as the title of the article suggests, it is imperative for board members to “learn” what they likely did not know when they first joined the board. I’m currently the president of a non-profit organization in my community. I’ve been on the board for over 10 years. I’ve personally spent time learning the keys to success for that organization by listening to many, many presentations and soaking it in one meeting at a time. I’ve worked with many clients over the years, and I am convinced the more the board of directors is given the right information, the better management and the board are able to work together to steer the health center in the right direction.
If you spend any time receiving daily alerts for job wanted postings, you likely know there are numerous companies looking for new finance leadership. Lots of opportunity out there.
So I wanted to give a few tips for a younger person that may be looking for a promotion to their first Chief Financial Officer (“CFO”) role, or perhaps you have landed that job and could use a few tips, especially for accounting professionals that are transitioning to the CFO role.
Every company handles various tasks differently, and “pushes” down responsibility in different ways depending on the size of the company, available resources, management style, etc. Therefore, the following is a list of a few things to think about, keeping in mind there are no “bright” lines:
CFO’s can fail because they stay in the weeds, either due to style or necessity due to limited resources. I believe in a very under-appreciated best practice that a second set of eyes can provide enormous benefit. It is difficult to analyze a given set of facts if you have to compile the facts first. For example, if a CFO has to compile a financial statement from scratch or has to trace numbers from financial reports to the underlying supporting documentation as a first review because the review has not been performed by a controller, then it is very difficult to perform a higher level “smell test” of the financial statements, which is key for ensuring accuracy and to begin to draw conclusions from the data.
The CFO role is a key role; it is very exciting and very challenging. I encourage any new CFO to embrace the role and develop the habit of continuous lifelong learning.
I work with a number of health care and other types of clients. In the last two years, I’ve been blessed to work with more clients than I can count on my two hands. One thing I continually encounter is a very dry but important subject - chart of accounts (“COA”) structure.
Too many companies know their books do not capture financial information in the way they should but they avoid the challenge of changing their COA. That’s not a very interesting subject but it drives financial reporting so thoroughly, I thought we should talk about it. Very often, the COA was originally developed from a canned package or frankly by somebody that simply didn’t plan well enough. As businesses grow in size or complexity or simply seek to increase their level of sophistication, a change in the COA structure may be warranted.
The following is a short list of leading indicators that there may be a need for a change:
If any of these questions trigger further questions, it may be worthwhile to invest in the time necessary to revise the COA. The following is a short list of things to consider:
These are a few thoughts addressing wholesale changes. Maybe the health center does not need a wholesale change; perhaps an effective change would be to simply add some accounts or departments. I’ve seen that approach work very effectively to enhance the reporting.
What’s most important is to step back away from details, remove oneself from the resistance to spend the time, and think about the gaps in your data analysis. Improvement in the COA can be necessary to become more data driven, which is usually the difference between an effectively managed health center and one that is struggling financially (as long as there is the will to respond to the data but that is a different topic!).
Have you ever thought about the fact that for those of us who live in an urban area such as Boston (worst traffic in America, literally per studies) our use of technology often times does not help us? Cars are a wonderful invention, saving us time, and they’re just plain cool to drive usually, unless it’s a Corolla. No offense to anybody out there driving Corollas, and I drive them periodically as rental cars when I travel, but Toyota does not make that car in order to add to the cool factor. Anyway what do I mean when I say that the technology does not help us? In the morning, when I need to get to work, 10 miles away, I could probably get on my horse, which I do not have, and get to my destiny at least as quickly as it takes me driving a cool car. I would probably also be less angry. As I’m sitting on the highway going zero (0!) miles an hour, I imagine myself on my horse, galloping along at least a few miles an hour and arriving at my destination faster than in my car. Ugh.
And so I ask… In your business, is there any underutilized technology that you own but for which you are not making full use? Is there any technology available that could help your staff do their jobs more easily?
I have seen several instances in my career, where a company purchases accounting software, for example, along with several add-on modules, and two years later they are still paying for those modules, but never got past the barriers in implementing the features. Now it sits there collecting cyber dust.
Additionally, it is quite common for people to delay intentionally or unintentionally tapping into resources available to them. It’s easy for a company to just get used to the way things have always been, and let’s face it, a set of processes that include paper usually works, however inefficient it may be.
Examples include use of billing, purchasing, disbursement and payroll modules, HR platforms, and document management to name a few.
A CFO could be helping to assess those issues and opportunities. An assessment should include:
Then follow up, to understand what were the barriers and more importantly, what would it take to implement the use of technology? What would be the return on investment? Would it make people‘s lives easier? Would timing of said processes be different? Would we need as many staff as we currently have?
After an assessment is complete and if there are opportunities identified it will be important for somebody to take the lead and put a plan in place for execution.
A routine review of these matters will likely pay off in many ways. Don’t buy a horse to avoid traffic. You likely can find a pretty cool way to get to work!
Said no business owner, ever. Though it may be a popular method of ordering by adventurous customers at restaurants, no business owner wants to be surprised by financial matters that are within our control to avoid such surprises.
In the nature of the work we do at Baker CFO Advisory, LLC, we evaluate company processes, internal controls, and financial reporting. Sometimes it may take a while, but unfortunately, we find matters within pre-existing systems, processes and controls that may surprise our business owner clients, and then we put plans in place to help mitigate that risk of future problems. Often times it answers the questions the owner had about challenges that they couldn’t quite figure out.
Do any of the following challenges sound familiar to you:
I could go on. With the proper expertise, planning, systems, and implementation of technology, it is possible to avoid these surprises. There are enough challenges in running a business, that adding stability and expertise in the business office will eliminate at least one challenge.
The above list can be mitigated with proper best practices.
Revenues and Collections: You should be evaluating the recording of revenues and outstanding charges in accordance with cash collections, contracts and sales agreements to ensure your books reflect the economic realities of your sales and collections.
Cash flow: Additionally, regular cash flow projections should be set up to help anticipate cash flow challenges, helping to plan for seasonality of sales, debt payments, payroll, etc. If cash is particularly tight, daily cash management may be necessary, but it’s unlikely that anything less frequent than weekly cash projections will suffice, looking out 60-90 days.
Expense management and other accruals: You should be evaluating your system to assess whether all liabilities, including trade payables, customer credits, or other accrual risks are properly recorded. Depending on the nature of your business, it’s quite possible that significant estimates are necessary. We have worked with companies that had very significant IBNR (incurred but not reported) liability risks with such a material impact on the overall finances of the organizations, that it made the difference between overall profitability and near-bankruptcy mitigation. Imagine the surprise at these companies if they had poor systems in place to properly calculate those liabilities.
Staffing: Is workflow as efficient as possible? Is the company making proper use of technology to make work life as efficient as possible?
Budgeting: It is important to have a financial plan that is always looking forward, evaluating the basics, such as ongoing operations, but also such things as “same store” sales and profitability, service line finances, return on investment in growth ventures, research and development, etc.
Back to surprises… they’re great in gift giving and celebrations, but can be the downfall of a business when it comes to managing its finances. If you’ve recently been surprised due to accounting and reporting issues, we would welcome the opportunity to help.
The moment you buy a new big screen television, it’s obsolete due to new products constantly coming on the market. The moment you buy a new laptop computer it’s also instantly obsolete. Why? Technology resources are advancing at an incredibly fast pace, getting better seemingly every week. What else is getting better? Fraudsters. They’re constantly trying to trick their victims.
I’ve seen multiple instances of fraudulent checks presented to banks for payment. Somehow, these criminals will prepare a very authentic-looking check from the company, with full and complete bank account information that is written to themselves and will even have an authentic looking signature from and authorized signer on the bank account!
If you take only one thing from this brief article, it’s this: talk to your banker about whether you’re taking advantage of the right tools for your business to protect yourself.
One available resource has been available to business customers for many years, but I’ve been surprised to find the number of clients that do not take advantage of the resource. That tip is to sign up for positive pay with your bank.
Some of my readers may ask, “Who writes checks with the number of electronic resources available?” It’s a reality that many companies are still using paper checks to pay their bills. Until our society transitions to a fully paperless society, it’s still a valid mode of paying vendors.
Without positive pay, a company (payor) sends out checks and each payee presents their check to their bank, which eventually passes through the payor’s bank. Assuming there are no obvious errors, the bank honors the check and passes the cash to the payee.
Positive pay is a service available from banks in which the company (payor) after issuing a check batch, will submit a list of the checks issued to their bank. The bank will store the information in their systems, and as checks are presented to the bank for payment, the check is compared to their list. If discrepancies are noticed, they present those discrepancies to the payor for research or to confirm payment denial. If a fraudulent check comes through, the check will be denied and the payor’s cash is preserved.
Somebody may say, “Well, if that happens to me, since it’s not my error, my bank will just cover it for me, since they allowed the check to be processed.” Not so fast. Very possibly the bank has given you an opportunity to sign up for positive pay with the disclaimer that should you choose to decline the available service, any fraudulent checks that don’t get caught will not be covered by the bank. I’ve seen instances where they will stand by that disclaimer when the inevitable check is paid.
Additionally, it’s very likely your insurance carrier will deny a claim.
This type of fraud is happening regularly and you may lose thousands and thousands and thousands of dollars. I’ve talked to enough people to know that not everybody is using this resource. There may be other ideas your banker has for you that is specific to your unique circumstances, but my tip is to start that conversation. It will save you some headaches.
Ahhhhhh, fall is in the air in New England. The air suddenly turned crisp, leaves are turning and even falling, baseball playoffs have started, football season is in full swing, basketball and hockey preseason has started, and in the name of “it seems to start earlier every year”, stores have put out Valentine’s day merchandise! Ok, probably not on the latter.
For many of you, it’s also budget prep season – perfunctory sigh. Yes that time of year, where the accounting department, realizing it’s running behind, dusts off last year’s spreadsheets and knocks out a budget in time for an upcoming board meeting. Upon approval, they hand it to department managers and say “Here, follow this.” Sound familiar? With that scenario, I ask, “How is the reputation of the accounting department?” Probably not so good.
Maybe it’s not that overtly mechanical. Instead of rolling last year’s budget forward or converting projected annual results to be next year’s budget, maybe there’s a quick manager meeting.
Perhaps there’s a more meaningful way. If you want to improve the accounting department’s reputation as “bean counters”, have improved collaboration, and more importantly, more than likely have a better budget, I suggest engaging the departments that are responsible to carryout the budget to be involved. The time could be well spent to think about strategy, investment needs, capital projects, refreshed view of the business, and overall open the lines of communication between the accounting department and other departments. I’m a big believer in having the accounting department leadership facilitating regular meetings with other departments to accomplish a current objective but also to establish rapport. Those monthly calls with department managers asking them to hurry up and approve those invoices so they can be paid will go much more smoothly. Those meetings really help to establish relationships and open lines of communication.
I suggest a plan such as the following:
Developing the budget will never be as fun as October baseball but with proper planning, and staff engagement, it can be an effective tool that fosters improved relationships, an improved sense of ownership, improved morale, and will likely spark some ideas that can contribute to more success.
9/4/2018 0 Comments
Having money problems? That sounds simple enough to fix, right? Spend less than you bring in or bring in more! Working with numerous companies over the years, I’ve learned it’s likely not that simple. Losing money is likely a symptom of other problems, not the actual problem. Find the actual problem, commit to fixing that problem, which will be a surprising challenge, and you’ll likely have solutions for the mysterious problem you thought you had.
You have the dream of owning your business. You have the idea. You probably have lots of questions that you’re asking and answering (or still struggling with): Will it serve a need in the market? How to pay for it? How to make it happen? Do I quit my job and work on your idea full time or start out part time? When do I hire employees? Will it help me earn the living I want? How to simply get things done, such as product design, technology set up, etc.? Do I bootstrap the start-up, borrow, or take on investors? Depending on the answer to that question, how do I find lenders or investors? Will I enjoy spending time in the business?
As an aside, that’s a good one that some entrepreneurs don’t ask. Owning a business can be a grind. At some point, it becomes less about enjoying the product or the initial glory of starting the business. It becomes the actual running of the business – managing people, product manufacturing, delivery, etc. I often recollect an interview of a college football coach (Urban Meyer I think when he was coach of the Florida Gators) said coaching football is a grind, all the video, planning, memorizing playbooks, etc. I immediately thought if a coach isn’t having fun being involved in football, every boy’s dream, then I don’t have a chance enjoying my job! (I found a way to do so, however. Thankfully!)
Another time I heard a young man tell his story of starting his own bakery in college and continuing it as an adult. At some point, the joy of baking and selling awesome baked treats that brings daily joy to customers was overtaken by the grind of inventory management, supply purchasing, employee management, building rentals, customer complaints, etc. Again, in the middle of an awesome job, there can be struggle. We all need to keep our perspective though.
My point with that little sidebar is to find something you’re passionate about, keep perspective and enjoy the path, acknowledging not every moment is easy or fulfilling. Hopefully you’ll find something in which the “grind factor” is not too consuming.
I’ve asked all these questions myself, because I’m a start-up, in various stages for a few small businesses, and I’ve also stopped pursuit of several others over my career because I didn’t like the answers to some of the questions above.
All that being said, one of the things I’ve always done is to at least understand the finances. When I’ve developed businesses or scrapped ideas, or if I’m helping one of my clients, after studying a business, I’ve always developed a financial model with key drivers. A good model will help to tell the financial story, which will help supplement your founding vision for the company, etc., as you talk to stakeholders.
What are the key drivers? It’s going to be different for every business, but rules of thumb include number of customers, prices, costs (including cost of research and development, cost of sales and inventory management, overhead, staffing and benefits, etc.), desired owner compensation, necessary capital, cash flow, liquidity, borrowing costs, investor infusions, tax implications possibly, etc.
It’s important to prepare a good model based on assumptions from these drivers to help quantify these matters, set targets, track progress, plan for cash flow, plan for distributions eventually (investor and owner), financing, and unfortunately, even to know when it may be time to do something different-either to turn the ship around with a different strategy or to scrap the business.
I see lots of models out there, and many times they’re too simple, often reflecting income and revenue. A good business model is more than simply revenues and expenses. The income statement is important and the assumptions used to build the initial model need to be reality-based. It also needs to reflect the complete financial picture: costs of capital, cash and liquidity, inventory financing, investor investments. These are all related to a balance sheet, and these assumptions will help you understand your ability to carry on the business in cash flow terms.
Additionally, it may be a good idea to do several versions to reflect different scenarios that the business may encounter. Eventually as the business gets off the ground, and you start to spend money and hopefully collect some too, “modeling” becomes “budgeting”. The assumptions and estimates become very real. At that point, the benefits of expert initial modeling will become readily apparent, as you start to see how assumptions become reality, and you learn what it will really be like to run the business. You’ll likely always need to be forecasting especially in the high growth stage in order to project cash flows, etc., but the more history you have, the more the assumptions can be based on your own story.
In conclusion, revel in the fun of starting a business, pursuing your dream. It is indeed fun. Some attention to your early financial modeling and planning will pay dividends.
Karl spends his time thinking about ways to help organizations with sound financial decisions.
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