I am currently working with a business owner who has serious cash flow problems. He couldn’t fully understand why the company was struggling, considering he was always booked and even, at times, turning down business. What he discovered, quite by accident, was that an employee was stealing money for years to the amount of somewhere between $350,000 and $500,000.
When I asked him why it took so long to discover the theft, he said he never put any value on understanding his financial information or monitoring cash flow. He saw the bookkeeping function as a “necessary expense” and treated it as such.
Sadly, according to the Association of Certified Fraud Examiners annual report, nearly half of all small businesses experience fraud at some point in their business lifecycle. It will cost these organizations an average of $114,000 per occurrence. Worse, such fraud is usually committed by a "loyal" employee.
It’s far too easy for an unscrupulous accountant or bookkeeper to commit fraud especially when the owner doesn’t have his or her finger on the financial pulse of the company.
Fraud or no fraud, the latest data from the Small Business Administration (SBA) states that nearly 34 percent of small businesses fail within their first two years. This same data shows within five years, 50 percent of all businesses fail.
There are many reasons companies fail but what I have discovered is if you can’t answer the following 5 questions correctly, I guarantee your company will, at best, constantly have serious cash flow problems and at worst, become part of that 50% failure rate.
Question #1 - What is your year-to-date revenue through last Friday?
Typical Answers I Hear: “We don’t have revenue entered through last Friday, our latest entry was … (some date usually well before last Friday)” or “Here’s the number but not all the revenue has been entered so it will change.”
Correct Answer: The actual revenue amount through last Friday. When answering the question, they should feel completely confident the number presented will not change due to some bookkeeper adjustments or other reason. (Also, this information should be supplied within 1 minute. It should be as easy as the bookkeeper pulling up the accounting software, selecting the income statement report using the dates from the beginning of the year to last Friday’s date and pressing ‘create report’).
What this tells me if you don’t have the correct answer: The financial information is not real time therefore, they are relying on outdated information to make financial and operations decisions (and that’s assuming they’re using the information at all). It also tells me if something as important (and easy to track) as revenue is not being recorded timely, the probability is high that other areas of the business considered even less important are probably ignored for weeks or months at a time.
Question #2 - Can you show me last month’s financial report?
Typical Answers I Hear: “My most recent financial report is x months old” or “We don’t create monthly financial reports”
Correct Answer: “Here it is,” as the owner pulls a copy of the report out of his or her file cabinet or desk.
What this tells me if you don’t have the correct answer: Nobody in the company is reviewing and comparing the monthly activity which increases the probability of waste and inefficiency throughout the company. By doing something as simple as comparing month to month reports, problems can be discovered within 30 days of it occurring, without reviewing monthly reports, problems could go unseen for months or even years costing the company tens or even hundreds of thousands of dollars.\
Question #3 - How often do you question the accuracy of your financial data?
Typical Answers I Hear: “All the time!” as they look at each other and smile or “On occasion”
Correct Answer: “Never” - your financial reporting and data should be so timely and reliable that the owner and employees never question the veracity of the information.
What this tells me if you don’t have the correct answer: There’s usually a far bigger problem because all the financial data is connected so all the data they collect is suspect. It also tells me that the company either is using bad information to make business decisions or ignoring important data points because of the unreliability of the data.
Question #4 - What are you forecasting the cash flow to be in 6 months?
Typical Answer I Hear: “We don’t forecast cash flow.”
Correct Answer: The owner pulls up his cash flow forecast spreadsheet, looks out 6 months and gives me a number.
What this tells me if you don’t have the correct answer: Cash is being wasted. Without forecasting, the owner and leaders can’t confidently make capital investment decisions. It also prevents the company from becoming proactive when preparing for forecasted cash deficits or cash surpluses.
Of all of the questions, almost every small business owner fails to answer this correctly and it’s the easiest one to fix.
Question #5 - Do you know how to read your Income Statement and Balance Sheet?
Typical Answers I Hear: “No, I don’t” or “Kind of “ (whatever that means!)
Correct Answers: “I know enough to ask intelligent questions to my bookkeeper and other members of my company.” or “Yes I do.”
What this tells me if you don’t have the correct answer: You are relying far too much on your accountant or bookkeeper and THEY know it. You’re making it too easy for them. As I said at the beginning, fraud happens to almost 50% of all businesses and many times by those considered “loyal”. Being able to understand the the financials enough to ask smart questions is all you need to significantly drop the chances of fraud occurring in your company. Also, this means the owner is not focusing on key data points and benchmarks to run the company leaving it up to each employee to make their own determination on what’s important and typically they make decisions that are best for themselves or their department.
If you failed to answer any of these questions correctly, it means you don’t have as solid foundation as you need for accurate, reliable financial data. It also means you are increasing the probability that your company will be ripe for fraud or part of the 50% that fail.
It doesn’t have to be this way! With some small adjustments, you can answer all of these questions correctly. If you’re not sure how to get there, I’m offering a 1 hour free session to discuss your situation and help you create the template you need to eventually answer every one of these 5 questions correctly.
Contact me at Tony@youretheexpertnow.com and I’ll help you create that solid foundation you need to ensure every financial and operations decision you make is the best, most informed decision you can make.
Running a business is hard work, don’t make it harder by failing to have a solid financial reporting foundation to build on. Get started on making changes today!