The Quick Fix? … Or the Whole Enchilada?

P1150501-002

Managers need information; that’s one of the laws of nature. The uses of information are endless, and managers constantly come up with new needs for reports, analyses and procedures. But information comes at a cost. The cost may be easy to calculate, as in the case of development hours required, or it may be an opportunity cost trade-off with the company’s other priorities.

Weighing Priorities

Whenever you have a need for information, here are the questions you’ll be asked:

1. How badly do you need it?
2. How soon do you need it?
3. If we can’t give you everything you need, what can you live with?
4. What are the projected cost savings or revenue increases?
5. What is the cost of getting the information?

Large organizations have developed sophisticated processes to allocate information resources among competing priorities, often involving some sort of ROI analysis. People do tend to exaggerate, though, so the objectivity and precision of the process comes under suspicion. Smaller companies, in my experience, tend to admit that they use more subjective methods to evaluate priorities.

The result is pretty much the same, though. Unless you have a critical need, such as compliance with a new accounting policy, a new line of business or an actual system breakdown…

You’re going to have to wait. Maybe forever.

The Quick Fix

The alternative to waiting for an exciting new series of reports and procedures, reconciled, actionable and fully integrated with all existing systems is the Quick Fix. This may be a compromise resulting from the answer to Question 3 above, or you may have to take matters into your own hands.

The Quick Fix is usually inexpensive, fast and gives you most of what you need. It can be a viable alternative to waiting for an entire new application to emerge from the murky dungeons of the development process. Or it can get you started on a new initiative without waiting for months, even years, to get the Whole Enchilada.

The Quick Fix isn’t always the right answer, though. Here are some situations I’ve observed over the years.

A Retailer

As CFO of a retailer, we received systems support from the specialty stores division of the internationally known parent company. The problem was that the specialty stores division was a shoe company, and we were a fashion apparel company. Many important issues needed to be resolved to customize the systems so our merchandisers could conduct business. So it was no surprise that when the accountants had a serious problem calculating Gross Profit and Inventory, we were sent to the back of the line, and told to wait.

For a small fee, we hired a programmer to develop a custom report that not only gave us reliable Gross Profit and Inventory results, but also provided the merchandisers with a clear picture of their operating results. It only took an hour or two a month to update the program, so the Quick Fix became a satisfactory permanent solution.

Some years later, a senior executive of the parent company saw our report, and ordered it installed in all the other operating companies. The systems development people jumped on it, and rolled it out to the entire company with great fanfare. But we just shrugged our shoulders… there was no need for the Whole Enchilada.

Real Estate Services

A real estate services company had passed the level of revenues that required them to change their tax accounting from the cash method to the accrual method. They recently asked me to help them make the transition.

The company had grown rapidly, but was still using Quick Books as its accounting system. It was certainly time for an upgrade, and the accounting conversion made it a perfect time to make the change. The only problem was that it would take months of time, and a substantial cash investment to research, purchase and install a new accounting package, and to integrate it with the business operations system. Meanwhile, the tax filing deadline was coming up fast.

My first suggestion was the Quick Fix. I suggested they continue using the methods the accounting staff were used to, and just make journal entries at the end of each month to adjust to accrual accounting. The CEO, however, wanted a deeper change, including a daily reconciliation to the output of their highly sophisticated operating system.

The situation clearly called for the Whole Enchilada, but timing was such that we needed a transitional Quick Fix to meet reporting requirements, and to fill in the gaps while we studied a fully integrated system overhaul.

I reviewed the business operating system, and found it to be sufficiently reliable to use its output as the source of accounting entries. The problem was that there were no accounting cutoffs or similar checks and balances for reconciliation, so I worked with the programmers to develop daily reports that verified the integrity of the data.

As a result of the project, management realized they needed to increase the sophistication of their financial department, and hired an experienced controller. I’m looking forward to hearing how they ultimately proceed.

A Homebuilder

A homebuilder had developed an elaborate and sophisticated construction management system, and its reporting mechanism was tied to an accounting package. Oddly enough, they also continued to maintain the original general ledger system that dated back to the 1970s. The problem was that the two systems generated very different information, and the senior managers each had favorite reports that didn’t agree with those used by other managers. Massive amounts of time were wasted in meetings, and one vice president spent most of his time reconciling the divergent reports. Needless to say, accounting was a nightmare.

The CEO had been instrumental in developing both systems, and was unwilling to see the need for change. The Quick Fix was practiced on a daily basis, but by the time the results were available, it was often too late to act on the information. An irreverent senior executive used an automotive metaphor, suggesting that when you opened the hood, the engine was run by squirrels on a treadmill.

The situation was crying out for the Whole Enchilada, and the Quick Fix just wasn’t working. Yes, the company went bankrupt.

A Land Developer

When I arrived for my first day as CFO of a land developer, I asked the controller for the most recent financial statements. “What do you mean?” she asked. That was the first sign of trouble. I soon learned that we had land on the books that we didn’t own, just as we owned land that wasn’t on the books. It was the same thing with loans and other assets and liabilities. In an organization with over 60 different companies, each with its own separate equity and debt financing, this was intolerable.

There was no Quick Fix to be found, so we shortly purchased a well-known industry-specific accounting package, and herded the numbers into their proper places.

The Whole Enchilada was the only option.

How does your company weigh the costs and benefits of implementing the Quick Fix or the Whole Enchilada?

Thinking About Year-End? … You Should Be

IMG_0270-001

Year-end is almost upon us again. Now is the time to get your house in order – it will take a huge amount of stress off the closing process a couple of months from now.

Being truly ready for the auditors can save audit time and fees, reduce stress on your staff during the audit, and maybe make your financials available for lenders and investors a little earlier. Equally importantly, audit-readiness is a good indication that your accounting department is organized and up to date. How many other ways do you really have to determine that? Here are a few things you should consider:

Preparation of Financial Statements

Do the auditors historically require that you make embarrassing changes to the financials? What has been done to avoid that this year?

–          Does your accounting department prepare the financials, including notes?

–          Have you questioned any balances or accounts that seem surprising or unusual?

–          Did you do anything different this year? Are you sure it is accounted for correctly? Now is the time to sort that out, not during the audit.

–          Have any changes in accounting rules affected your business? Are there any changes not yet required that you could implement early?

Reconciliations

Reconciliations provide explanations for changes in Balance Sheet and P&L accounts, and your accounting department should be able to show them to you every month.

–          Do you know exactly what is in every balance sheet account?

–          Can you explain every change in the balance sheet?

–          Have expenses been calculated consistently every month?

–          Can you show how cost of goods sold affected inventory every month?

If you can say yes to all of these items, updating to year-end should be a piece of cake.

Updated Estimates

Where your monthly accruals and amortization calculations are based on volume or other estimates, have they been updated to be sure the year-end balances are correct? Again, a 2 month update at the end of the year is a lot easier than doing it for the entire year.

Variance Analysis

Has there been a thorough analysis documenting all significant P&L and Balance Sheet variances from last year? Are the explanations reasonable, and the underlying facts correct?

Documentation of Procedures

–          Are the fundamental internal control procedures properly documented?

–          The auditors typically make recommendations for improvements in procedures and controls if they find any deficiencies. Were last year’s recommendations fully implemented?

–          Have changes in staffing or procedures resulted in changes to the control environment? Now is the time to correct them.

Not sure if you’re going to be ready for year-end? Do you know who to call?

A Part-Time CFO

IMG_8646-001

At certain stages of growth, many companies find themselves in the awkward situation of needing the services of an experienced CFO, but feel they can’t afford to hire one.

Yes, a good CFO with the depth of knowledge and experience you need can come at a steep price. And – no offense intended – there may not even be enough to keep a good CFO challenged and interested on a full-time basis at this stage of the company’s growth. So what are the options?

The Options

Try to hire a CFO who may or may not find the job satisfying and lucrative enough to stick around for a while.

Hire a slightly stronger accountant at a slightly higher salary, and hope that he or she can rise to the challenge of a job far beyond his or her education and experience level.

Redirect your attention away from running and growing your business to focus on the CFO role yourself.

Ignore the financial needs of the company, and hope for the best.

Divide up the CFO role and ask your other executives to take care of it in their spare time.

OR…

Hire a part-time CFO at a fraction of the cost of a full-time CFO.

What Will a CFO Do for You?

In collaboration with you and your management team, an experienced CFO will quickly assess the company’s finance, accounting and control needs, and lay them out in order of priority. Areas that he or she will be considering include:

Project the future needs of the company based on achievable growth plans – resources, facilities, and the associated costs.

Identify and quantify financing needs to achieve the business plan – both short term and long term.

Develop relationships with financing sources – debt and equity – that are important to the company’s ability to operate and grow today, as well as to support long term growth and development.

Evaluate and make recommendations regarding the strength of the existing accounting staff.

Evaluate and make recommendations on accounting and information systems.

Oversee the preparation of financial statements, ensuring that the best professionals are chosen to provide auditing, tax and other outside services.

Lead the preparation of operating budgets to keep the company on track to achieve its short term goals.

Introduce the management disciplines and internal control structure necessary for the next level of growth.

Advise on the most appropriate methods and rates of growth – including acquisitions.

Conduct due diligence on acquisitions, and satisfy due diligence requirements of investors and lenders.

Lead programs and efforts to contain and reduce costs while still fostering growth.

Strategize on potential exit strategies – sale of the business for example – and help attract investors and buyers.

What to Look For

The more experience a CFO brings to the table, the more widely that experience is likely to vary among the candidates you speak with. All the more reason to have an idea of the qualities that are most important to you and your business. Here are a few thoughts:

Do you feel comfortable talking to the CFO? We all work better with people we like and trust.

Does the CFO seem to find your business interesting? Of course you find it interesting, but you can’t just assume that others do too.

Is a CPA important? Yes, it probably is. It demonstrates a minimum intellectual standard and level of accounting knowledge, and like the top business schools, the top accounting firms tend (with clear exceptions) to attract the best talent.

Does the CFO have a wide variety of experience in which he or she had to show resourcefulness and flexibility, as well as the willingness to learn on the job? How has he or she performed in situations similar to those likely to arise in your company? References come in handy here.

Has the CFO worked with companies similar in size to yours? I can tell you that working for a Fortune 100 company is very different from the environment of an owner-operated entrepreneurial venture. If you are planning to grow rapidly, does the CFO have rapid growth experience?

How about industry experience? Unless you are in a wildly specialized business like banking or insurance, industry experience is probably not critical. CFOs and CPAs are famous for their transferrable skills, and should be expected to learn your business quickly. On the other hand, some businesses like real estate have a steep learning curve, and some prior experience can make a big difference.

Why would a CFO want a part-time position? If this is a temporary move while he or she is looking for a full-time job, it doesn’t have much long-term potential. On the other hand, there are plenty of financial executives who like the flexibility of a part-time situation, and who enjoy working with a variety of interesting clients, each with its own challenges and rewards.

As the company grows in size and complexity, would the CFO potentially be interested in turning a part-time arrangement into a full-time position?

Do you know who to call to discuss hiring a part-time CFO?