Do You Understand Your Company Financials?

January 2020

Recently, I started working with a new client as an Interim CFO.  I quickly began learning the monthly financial closing process that was in place.  The process had the previous CFO crunching numbers each month and then emailing a very large packet of financial information to the business owner and the management team.  So, I did the same thing for a couple months until I realized that no one was looking at or responding to the financial information that I was working so hard to put together.  There was no monthly meeting where the managers had to explain their performance for the month.  There were no questions, no comparisons to budget, and no action items.   As I started digging into the numbers, I found many things worth discussing. One department had costs that were trending up significantly and no one had noticed.  When I started asking questions about the increases, I was told that the manager of that department didn’t have a set spending budget but was very trusted.  Unknowingly, his spending was increasing year over year, taking an additional 0.5% of net income off the bottom line.   Other areas of the business were also incurring cost creep, such as rising overtime. This lack of management was resulting in poor cash flow and rising interest expense. The managers didn’t know what expenses were hitting which expense accounts, so how could they possibly be responsible for managing them? Not having the watchful eye of a strong accountant, along with an educated owner and management team, was easily costing the company 2% of net income per year.  All these items were very controllable if properly measured, managed and discussed.  Remember, what is measured gets done! In working as a Financial Consultant and CFO for numerous businesses over the years, I’ve come to realize that many business owners and managers do not focus enough on company financials.   Often, small businesses forgo the cost of having an accounting resource that can provide meaningful financial information.  Without question, this decision creates hidden costs across the company like those described in the example above.   Some companies don’t issue any financial statements or metrics on a monthly basis.  Others go through the motion of creating financials and issuing them to the management team without any type of formal review.  Very few companies issue timely, meaningful financials and utilize them to produce clear action items and to make sound business decisions.  This is one of the most important obligations of all business owners and managers, In the financial details are the answers to understanding the overall health of a company, how it is truly performing, and what trends are taking place over time.  Utilizing this information should steer the company’s course of direction. I believe the reason businesses overlook the importance of financials is twofold.  First, business owners often like to think big picture and not get into the details of the business - financial information is boring. Second, owners and managers often don’t truly understand many of the basic financial statements such as the balance sheet, income statement, cash flow statement, or metrics.  They haven’t had formal financial training and are afraid to ask questions for fear of looking foolish.  However, being an effective business leader requires you to know the answer to questions that are financial.  What is happening to my cash and inventory position?  Which of my costs are trending up or down and why? What is happening to the margins on each customer account?  Have the investments I’ve made into capital improvements paid off?  Which metrics are the most critical to my business and what is my goal for each metric?  Am I making money every month?  Are my employees efficient? As you start thinking about your business goals for 2020, go back to the basics.  As a business owner, make sure you have a strong accounting resource for your business.  Expect to see timely and accurate financial information on a monthly basis.  Ensure that you and your managers are properly trained on how to review and understand basic financial information and metrics.  Meet with the management team monthly to review the financials and have each manager report on their department expenses. Develop action items and drive your business in the direction it should be driven based on what the financial information is telling you.  If you take these steps, you will diminish the hidden costs in your business, increase your net income, and make sound decisions for the future! Kelley Ramos, CPA is a consultant at Journey Consulting, LLC, in Green Bay