What do I mean by lousy financials?
- Not
timely
--
It's
not
unusual
for
an
owner
to
get
monthly
financials
2
weeks
or
more
after
the
close
of
the
month.
At
that
point,
any
problem
he
detects
in
the
prior
month
has
cost
him
a
2-week
delay
in
getting
fixed
- Late
postings
or
postings
in
arrears
--
This
is
a
killer.
Credit
card
bills
come
in
several
weeks
after
the
fact
and
post
charges
to
the
prior
month
(that
the
owner
didn't
see,
even
if
he
looked
at
the
month's
results
a
week
or
two
after
month-end).
This
problem
can
be
averted,
using
online
Credit
Card
statements
(almost
real
time)
to
post
actual
charges
through
the
last
day
of
the
month,
(they
become
payables)
regardless
of
the
billing
cycle.
Of
course,
there
are
multiple
possible
sources
of
late
postings.
Specifically,
if
you're
not
closing
and
controlling
your
accounting
platform,
users
can
post
costs
or
credit
invoices
in
prior
periods,
and
you'll
never
see
it
in
the
current
month
(profits
just
evaporate
from
the
YTD
figures).
A
good
opportunity
for
not
only
employee
theft,
but
also
misinformation
in
the
current
period.
- Committed
Costs
--
Another
killer.
Even
in
simple
platforms
like
Quickbooks,
you
can
use
an
"Item
Receipts"
technique
to
post
costs
you
know
you've
spent
already
(say,
with
subcontractors)
in
the
month
they're
incurred,
rather
than
having
them
come
in
60
days
later,
hammering
that
month
(while
you
were
still
feeling
good
about
the
fat
month
where
you
booked
the
revenue
from
the
customer
without
this
cost
on
the
books).
- Mismatch
of
cost
and
revenue
timing
--
Another
killer.
It's
critically
important
to
match
the
month
in
which
you
bill
with
the
month
the
related
costs
are
incurred
--
both
material
and
labor.
Otherwise,
your
month-to-month
performance
will
be
whipsawed
one
way
or
the
other,
and
you
never
see
the
budgeted
business
model
(ratio
analysis)
--
how
a
"good"
month
is
supposed
to
look
- Lack
of
understanding
of
Accrual
vs.
Cash
income
statements
--
One
of
the
killer
features
of
Quickbooks
is
its
"dealer's
choice"
switching
of
Cash
vs.
Accrual
on
demand.
Most
small
businesses
pay
taxes
on
a
cash
basis.
Other
than
that,
you
want
to
run
your
business
on
an
Accrual
basis,
carefully
matching
up
the
month
the
income
was
incurred
(based
on
billing
date)
and
the
date
the
costs
were
posted
(based
on
date
spent
or
committed).
That
way,
each
month's
income
statement
is
a
credible
representation
of
how
the
business
actually
did
that
month.
I've
seen
swings
of
plus
or
minus
200%
of
monthly
net
profit,
simply
due
to
errors
of
timing
in
when
revenue
and
costs
were
posted.
And,
of
course,
if
you're
trying
to
manage
from
a
Cash
Basis
income
statement,
it's
completely
warped
by
timing
of
customer
payments.
Worse
than
useless.
- Lack
of
understanding
of
income
statement
vs.
balance
sheet
postings
--
Your
vehicle
loan
payments
aren't
expense
items.
The
interest
portion
is
--
the
principal
portion
is
debt
reduction
(assuming
you
properly
put
the
vehicle
on
the
balance
sheet
at
the
outset).
Many
businesses
expense
items
they're
actually
holding
in
inventory
--
again
distorting
profitability
of
both
the
month
when
they
buy
them
and
the
month
when
they
sell
them.
- Inability to understand and forecast working capital needs -- If your accrual income statement is wrong and your balance sheet is wrong, it's almost impossible to forecast what your working capital (Inventory, WIP, Accounts Receivable) needs will be. That's like flying with no cockpit instruments. Potentially fatal.
So, why does conventional wisdom lay business failure to "undercapitalization"? I think it's because the likely outcome of lousy financials is the same as bad cockpit instrumentation -- people fly into the sides of mountains with no warning. You only get to run out of cash once -- you can come close to running out of cash a lot of times. If you're the victim of any of the above, you're a prime candidate to run out of cash. And when the mourners gather, someone says, "What happened?" and someone else says, "He ran out of cash -- he was undercapitalized." Like a lot of accidents, it didn't have to happen that way.
Two of my friends, both victims of lousy financial information, lost their businesses during this recession. They were good operators. They were good businessmen. Worse than no instrumentation, their instruments were wrong, and they ran out of cash. They had been adequately capitalized all along -- they just didn't see it leaking away in time.
