Don’t Tell me what I need for my Business!

Author: Larry Chester, President

Don’t Tell me what I need for my Business!

We not only think about what we want our companies to be, but we have an image of what our companies are and the issues that they face. Sometimes they are based in things that we experience every day, but sometimes these are rooted in our dreams and aspirations. What we see, or think we see, is impacted by the lens through which we view our world. Our experience and our education color what’s before us, and can obscure reality. Employee performance issues are problems that owners deal with on an irregular basis. Resulting company problems may hang around long after the offending employee is gone. Then the question is ultimately what are you solving, the symptom or the problem? And do you understand the difference? Especially for business owners that are unfamiliar with finance, chasing the symptom sometimes accentuates the problem without providing resolution.

Bringing Value Through CFO Insights

When a company is in difficulty, it’s often a cash flow shortage that first raises the red flag. But these situations don’t appear out of the blue. These problems have been building for many months before the dam finally breaks and action needs to be taken NOW. Sometimes ownership just dumps money into the company to buy time.  Usually, operational difficulties are the root of the problem, and the solution may not be the one that ownership has identified.

• Business – HVAC construction company
• Location – St. Louis, MO
• Sales − $18,000,000
• Ownership – Husband and wife, with a grandson serving as COO.

Initial Contact

The wife, who served as Chairman of the Board, reached out with a problem. They needed an interim Controller to put their accounting team back on track. When they described their situation, it looked like it was broader than just filling a gap in their staffing. The company had a fractional CFO that was doing less and less for them over time. They had a full-time controller that had left the company six months earlier. The accounting manager left three months ago to work for a company with younger people. Their AR and AP accounting staff had been replaced twice in the past year. The owners finally filled in the openings part-time with long time employees from elsewhere in the company, and the COO cross trained them in data entry.  Their view was that a new interim controller would bring them up to speed.

Significant Findings and Recommendations

Further discussions showed that the problems ran deep. The company’s line of credit had been cancelled six months earlier. They were 6 weeks behind in invoicing. With between 500 and 2,000 AP invoices needing to be entered, the owners insisted that each invoice be matched to the job that they belonged to, so that project profitability could be measured. Coding was inconsistent, since those doing the data entry had no accounting experience. The company was being charged for sales tax even though they were reselling the parts. Looking up individual jobs that AP invoices related to added to the long backlog, because invoices weren’t properly annotated, and nobody remembered which job they belonged to.

Staffing

Even though candidates were hard to find, the owners insisted that a new controller have construction company experience and years of experience working with their existing accounting software. They felt  that someone with experience would make their backlog quickly disappear because they would do data entry more quickly. Following our discussions, we determined that the search for a controller, though helpful, wasn’t getting to the heart of the problem.

Recommendations

• Create a plan for re-staffing the accounting department. The current approach to hire a controller and reassign existing employees to do data entry was misguided.   The first move should be to determine what staffing was actually needed, and then put a plan in place to fill those roles effectively for the long term.
• Hire several skilled data entry clerks on a temporary basis to clear the backlog. The key here is to hire people with data entry skills in accounting, rather than spending time looking for people with deep experience in their software. Experienced staff can learn new software quickly.
• Take the opportunity with the temporary staff to judge their long-term capabilities. Use the temp assignment as a test, to “try before you buy,” and measure their performance. Then, offer full time employment to the best of them.
• Look for a controller with construction experience. Software experience is less important than knowledge of construction accounting methodology.

Procedures and Backlog

The changes in staffing left the company with nobody who knew how processing in the accounting department was done. It was up to the COO, who lacked a finance background, to train the new staff. As various temps were trained, the education and directions he provided lacked consistency and accuracy to create proper financial reports.

Recommendations

• The current accounting procedure manual was more a list of where paperwork was routed than instructions to properly code and enter documents. With guidance from the company’s outside accountants, create a textbook about their accounting processing and how it should be done.
• Prioritize invoicing on current company activities. Vendor invoices for current work should take top priority to provide backup for current construction work and to assure that all AP invoices are properly coded to individual jobs. Then the appropriate Sales invoices can be created.
• The second priority should be resolving the backlog. This should be done in the quickest way possible. Code backlogged invoices to cost of goods sold rather than researching each invoice to identify individual jobs. Tracking individual job profitability is less important than becoming current with AR invoices and paying bills to keep their vendors happy.

Often business owners either don’t see the handwriting on the wall or feel that what they are experiencing is just a bump in the road. But when these problems build on each other, the company is left short staffed, and both invoicing and AP payments are late. Then, vendors stop shipping because their bills aren’t getting paid. Just throwing staff at a problem to clear the backlog won’t solve the long-term problem. Fixing these problems involves more effort and planning. What is the root cause of staff leaving and lack of profitability? What is the fastest way of getting current financial operations back on track?

Companies need structure, not just staff. What are the priorities, the immediate goals, the long-term objectives? It is creating the plan that provides the direction. But this is only effective if management actually sees the long-term problems the company is facing. Continuing down the same path as before, but doing it faster won’t solve their problems. Decisions need to be made that will have a positive impact and turn the ship around. This isn’t always easy because the truth can be painful, especially after 20 or more years of successful operation. But the success of many companies, especially in difficult times, depends on reality, and not a view that is colored by the lens of our dreams or prior experiences.

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