Surprise Me!

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:

• Your accounting team tells you a draw on the line of credit is all of a sudden necessary.
  
• Sales seem to be strong yet cash in the bank seems low.
  
• Your monthly bottom line just doesn’t seem to make sense, meaning it’s too low.
  
• Perhaps more importantly, your monthly bottom line just doesn’t seem to make sense, because it’s too high.If it’s too good to be true, it probably is.
  
• Unexpected hiring is necessary just to get all the work done.
  
• Total revenues on your income statement seems out of whack with how you know things are going.
  
• You come to the end of year, and a year’s worth of profitability is wiped out due to year end adjustments your accounting team tells you is necessary to close the books for the year.
  

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.