Financial Statements & the Fractional CFO

I recommend to all my business clients to prepare timely monthly financials statements on a full-accrual GAAP basis. In my opinion, it is the only way for achieving a true performance measurement of the business as the financial statements match period revenue with the corresponding period expenses—unlike cash basis financials where revenue and expenses may not be presented in the same period.

Unfortunately, many business owners overlook the importance of having reliable financial information, and for some it means …”they are flying by the seat of their pants” when it comes to managing their finances and business operations.

Without having the crucial information, it is very difficult, if not impossible, to own and operate a business. As a graduate of an aviation program at Purdue University, I often relate a business owner operating without this vital information as “flying in the clouds” –without an instrument rating and working within only visual flying rules. Once in the clouds one cannot determine where they are nor can they see trouble that might be ahead. One simply cannot say they know where they are.

On the other hand, an owner who has the financial information and uses it to make decisions is like the pilot who has an instrument rating. The aircraft can be flown without having to see out the cockpit window—it’s flown by following the indication of the instruments in the cockpit panel. Whether clear or cloudy conditions prevail –the plane can be flown by instruments. See the difference—on which plane would you like to be the passenger?

So, what does it take to have these financial statements prepared? Hire a CFO or Controller level accountant. Hire someone with the education, skill level, and experience to properly prepare the financial statements.

You might say, “I have a bookkeeper—why can’t he or she do the job?” Most likely they have not had the training or experience to understand the accounting rules to follow when preparing financial statements.  Many might be unaware of what monthly closing entries are required or how to prepare them.

You might say, “I cannot afford to hire a full time CFO.” In many instances this can be true—especially with small to midsize businesses.  Because of the value they can bring and the responsibilities they manage, CFO salaries will be higher than other accounting level positions.  If you cannot afford to hire a full-time CFO there are alternatives—more on this in a moment.

You might say, “What I have now suffices…the information is good enough for me.” Are you considering borrowing money for your business now or in the future?  Are you contemplating selling your business or maybe bringing in an outside investor?  One thing I can say with certainty is that a lender will want full-accrual GAAP financial statements, which includes this year plus the prior two years.  The potential buyer will want the same, if not more.  You might think ”I’m not selling for 5 more years.” Wisdom would seem to say to start now with having the financials properly prepared.

The alternative to hiring a full-time CFO or Controller is to out source the function through what is referred to as “fractional CFO” service firms. You can rent your CFO and have them assist in the crucial areas of your finance and accounting matters. Those areas include preparing financial statements (or provide oversight on their preparation), preparing cash flow analysis, and assist in strategic matters. You determine what you can afford, and what can be accomplished within your budget.

Fractional CFO firms provide CFO positions, Controller Positions, and other general accounting positions. Most firms offer a free assessment to help determine the company’s immediate needs, and how to properly provide the right personnel to meet the client’s needs.

The benefits are many with having financial statements prepared under full-accrual and GAAP basis. The credibility of a company goes up immediately from a lender’s point of view—and this is whether the company is highly profitable or not.  Lenders want to see business owners engaged and managing their businesses—this is one leading indicator.

I believe the most important reason, however, is that you owe it to yourself as an owner to have your financial statements prepared properly and accurately. It’s your money and investment; you should know and be able to say how it is really doing.  Finally, be prepared for those times when you will need to have the financial statements –you might need additional funding or that buyer may come along when you least expect them.

Copyright 2018 -Clouser On Business