Category Archives: balance sheet

Dogs Will Lie, but the Numbers Will Not

Mindy Barker | Barker Associates

Are you wrapped around your pet’s little paw? We are, despite the fact that we recently learned they will lie to us.

Last night, I fed our Maltese and Bichon Frise their dinners and went about my evening activities. Later, my husband, Glenn, came into the kitchen and the little guys acted as if they had missed their dinner. Given the circumstances, he, of course, fed them again.

While our dogs may lie about whether they’ve eaten yet, some things never lie, such as the real data you need to run your business each day. And whether or not you intend to, it’s the same data you need to pitch to investors when seeking funding.

With the right infrastructure in place, you have answers at your fingertips, such as:

What is the seasonal fluctuation of my business so that I can prepare for the ups and downs?

What is the demographic profile of my customers so that I know where, when, and how to reach them?

What is the average cost, price, and profit of a sale? Am I losing money on my best sellers?

These questions and many more can be answered by having the right infrastructure in place and capturing the data as you conduct daily business.

What does the “right infrastructure” look like? The answer is different for each organization based on its size and complexity. At a minimum, an organization should have a list of existing and potential customers and a system to maintain communications with them. The optimal tool is an integrated Customer Relationship Management (CRM) system. An organization also needs to manage money and financial information to project cash flow for the next 12 weeks, have the correct information for tax compliance, and make the appropriate strategic decisions. This may mean you need a separate billing system and/or General Ledger. You also need to properly set up your General Ledger with the right coding segments to be able to report on profit and loss by product, location, customer, and department, among others.

If you feel that you are blindly making decisions about hiring, marketing, warehouse space, or any other issue, remember the numbers don’t lie. Let’s talk one-on-one in a free consultation to get you in the right direction. Check out these times on my calendar and choose the one that is best for you.

Keeping Your House…and Your Books…In Order

Mindy Barker | Barker Associates

When I have guests over for dinner, I empty trash cans, pull out the cloth napkins, and replace the everyday hand towel with a nice guest towel. The morning after the dinner party, I almost always say to myself that we should keep the house this tidy and organized all the time. A decluttered house feels really nice. Working at home during the pandemic has allowed me to have the time to keep the house up better and I have enjoyed it.

Think about getting your house in order and keeping it that way, similar to keeping your books and records audit ready. When business owners and their CFOs go through an audit that requires a lot of up-front preparation to get the information auditable, they generally discover facts about their business of which they were previously unaware. The ability to use financial data to think strategically and make sound decisions about the operations of the business is not a luxury to undervalue.

Auditors estimate their costs for performing your audit based on the books and records being clean and auditable. I have asked some auditors how much more first year audits cost than their original estimate due to the books and records being out of order. They report that the range is 20% to over 10 times the original estimate. This is not a pleasant outcome for anyone.

Here are seven tips on how to keep your books auditable and help reduce your audit costs.

Maintain a checking account balance in checkbook style that one person reconciles to the bank statement and then a second person reviews for accuracy.

Reconcile balance sheet account balances no less than once a quarter, if not every month. The two accounts that are generally audit gremlins are prepaid expense and accrued expenses. If you have not reconciled these accounts in the last year, I can almost guarantee you there will be unexplained numbers in them.

Keep a data room with all of your contracts and loans. With the digital age and the end of the metal filing cabinet, this seems to be something that is rarely maintained appropriately. Read more about the data room in my previous blog Who is Your Betty.

As soon as you decide to engage an auditor, your immediate next step should be to get the list of information they will want. Assign a person and a due date to each item on the list and distribute it to the responsible parties. Set deadlines for delivery of the documents and monitor progress until the tasks are completed (Excel schedule, Asana, or other project management software).

Complete the confirmation information and attorney letters immediately after you receive the list of the items the auditors want to confirm. Make sure the auditors give it to you as soon as you have a year-end trial balance for them to review.

Provide the auditors with a complete trial balance. Every adjustment to the trial balance you provide auditors increases the price of the audit.

Work on the format and disclosures of the audited financial statements for the current year as soon as the previous audit is complete. There is no excuse for digging through loan documents to prepare the financial statement footnotes after the year-end, or to read a new GAAP disclosure to figure out how to do it after year-end.

Barker Associates works with companies to access audit readiness, which is a far better investment than starting an audit with false confidence you are able to get through the audit. Let’s work together to make sure your audit fees are not multiples of the original quoted rate from the auditors. Click here to set up a free consultation.

Negotiate from a position of knowledge

Mindy Barker | Barker Associates

How would you respond if someone made a legitimate offer for your business? Would you know if the amount is what the market would pay? Even if the offer sounds like more, or less than you imagined, you want to respond from a position of knowledge, not sticker shock.

Valuation is the value an investor would place on your company if you were to seek investment funding. From a negotiating standpoint, it’s better for the prospective buyer to say a number first so you have an indicator of how serious they are. Prepare yourself – arm yourself with the knowledge of a realistic valuation so you can effectively negotiate.

One measure of the value of your business is what someone will pay for it. Enterprise Value is a real number that investors calculate using your historical financial statements to arrive at a multiple of revenue, or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Other factors influence the value that could actually be paid for the business.

For example, are you loading your books with personal expenses and other tactics to avoid paying taxes? When investors value your business, such expenses can lower your EBITDA and affect the sale of your company.

On the other hand, EBITDA can be higher when you keep personal and business expenses and bank accounts separate and run your business as a true entrepreneur. Large and small organizations alike are guilty of combining personal and business expenses. C Suite executives in large organizations without governance over their expense account can significantly impact the value of the business by deflating the run rate of profit. Smaller businesses sometimes pay their family members a salary without the family member ever doing any work for the organization. Neither of these examples are proper stewardship over the financial governance of the organization.

Then there is the value that the market will bear. Factors that can influence the actual value paid for your business include how scalable your infrastructure is – the people, processes, and technology. If a new owner wants to focus on growth, is the right infrastructure in place to support that or will the new owner have to invest in infrastructure first? How much debt are you carrying? Someone has to pay off debt when the business changes owners.

On the other hand, your approach to acquiring new capabilities – buy, versus build, versus lease – in some cases can raise the value that the market is willing to pay.

Your role as an entrepreneurial leader can also influence the market value of your business. Employing a strong team who lead and run your company with an eye to the future is much more attractive than a business operating with old, inefficient processes and no new product launches.

My goal with this post is to help you understand the importance of knowing the value of your business. You never know when someone is going to reach out to you with an offer you cannot refuse. Be ready by knowing the valuation of your company so you can speak intelligently – before you get on the emotional roller coaster of discussing a transaction.

Want to learn more about Enterprise Value – what it is and how to build it? Check out my post from awhile back – Look at Your Business Like an Investor. For an even deeper dive, including how to calculate EBITDA, download Pitching to Win: Strategies for Success from Amazon.

I would love to speak with you about your unique situation. I invite you to set up a 30-minute free consultation with me right now by clicking on this link to my calendar – let’s talk!

Getting to Day Zero

Companies are going through year-end financial reporting. Just for fun, at cocktail parties and networking lunches, I ask executives and investors if they get the year-end results as quickly as they would like to get them. My unofficial survey says that most stakeholders are not receiving results timely.

Proactive organizations have “Day Zero” at the top of mind at the beginning of the month. If you don’t know what this means in terms of proactively managing your financial strategy, read on…

The truth is that almost every single employee in an organization can impact the ability of the accounting department to close timely, yet the company accountant may not be the best source to drive home that truth. The message from the top should convey respect for each professional’s time and support for more efficient month-end and year-end processes – where everyone focuses on funneling information in a manner to close the records effectively. The ultimate goal is to provide to the management team a Flash Report as soon as possible following month-end, followed by the official month end financials.

Day Zero refers to tasks your accounting and finance departments can complete prior to the end of the month to speed up the month end close. Decisions about the company require timely, accurate data – a smooth and timely month-end is vital.

Some “green eyeshade” accountants may balk at the idea that they can shorten the month-end process; however, the strategic finance professional digs into their process to find and tackle these tasks, as well as improving their process going forward. 

Mindy Barker | Barker Associates Getting to Day Zero

Here are some examples of what I mean:

  • Recording depreciation,
  • Making standard monthly entries for amortization of intangibles, and
  • Recording accruals of expense.

Once you have identified the pre-close tasks, create a Day Zero checklist with deadlines for each item. The finance manager should oversee that deadlines are being consistently met and if not, get to the root of the problem to correct the process. One solution may involve asking other departments to turn in their information based on a schedule you provide in advance.

Refining your month-end close process is an iterative process if you continually raise the bar to identify better ways to execute. Automating reconciliation and other process improvements contribute to shortening the cycle.

Document your processes with Standard Operating Procedures so that all team members have steps to follow should any one team member need backup. Keep your SOPs up-to-date through periodic review.

Spend time in the middle of the month following the month-end process to complete your review of the entire process. Engage your finance team and uncover those Day Zero tasks you can incorporate into your process. Everyone in the organization will benefit when leaders have more timely and accurate information with which to make decisions.

If you are disciplined and implement Day Zero and other month-end processes, you can provide a Flash Report of results to management as soon as Day 1 after month-end.

Barker Associates can facilitate a review of month-end processes with your team to ensure you have uncovered all the possible streamlining opportunities. Provide the best customer service to your management team possible – provide financial information and think strategically and become part of positive initiatives to move the entity forward and not the green-eyeshade accounting department about which everyone complains.

Five Steps to Create Meaningful, Visual Reports

Special Contributor Danielle Moga, Barker Associates

If a picture paints a thousand words, the charts and graphs being compiled for reporting packages should tell a very colorful story; however, the dashboards and scorecards being created, though visually appealing, are lacking a strong story line and worse yet…a plot.

Accounting and financial professionals spend hours compiling data from disparate systems to provide an “at a glance” view of information, but often times the rainbow of colors is the best part of the document. The information is typically flat, one-dimensional, and lacks actionable data to help the audience improve financial and operational goals.

Two ladies standing looking at visual charts

By following these steps, you can create meaningful visuals that tell a story and provide actionable insights to your team:

1. Begin with the end in mind

Determine if the time creating visuals is worth the time and money it takes to compile. Most leaders don’t understand the hours it takes to pull data together and create meaningful visuals; rather, they see a pretty cover page leading to traditional financial reports. If the visuals are not connected with actionable goals and socialized with leadership and the teams responsible for the measure, they are a waste of time and add no value to the final product.

2. Define what you want to measure

If leadership wants to use visuals to tell a story, then they should use the correct tool to tell that story. “Dashboard” and “scorecard” are tools used to deliver periodic metrics. The two terms are often used interchangeably, but they are different. A dashboard is typically linked to multiple systems, provides real time data, and has flexibility in design, depending on the person or team using it. A scorecard is a snapshot in time, of a specific measure to a pre-determined goal. Leaders who are actively engaged in selecting the measures to be used and the delivery tool can ensure the measure is tied to a specific organizational goal as well as gain the buy in and support for achievement from their staff.

3. Discuss the strategy

I’ve seen too many organizations go through painstaking efforts creating a strategic plan, only to have the completed document sit on the shelf to collect dust. Strategic initiatives, if designed properly, should propel an organization forward and those are the items that should be measured and reviewed regularly. Ideally, senior leaders should review progress towards goals with internal teams and leadership quarterly; review goals semi-annually with the board.

4. Tie results to performance

“What’s measured improves.”

Peter Drucker

It doesn’t make much sense to design a measure if you don’t have accountability tied to results. The individuals and the teams responsible for achievement must have the ability to successfully complete goals without barriers that prevent performance. For instance, I’ve seen organizations tie cost savings initiatives to the accounting team without including the purchasing or sales teams that actually spend the money. One of my favorite examples of poor planning and misaligned goals is an organization that had a goal to use new software for the organization; however, no one consulted with the IT team or the project management office to ensure resources were allocated to support and implement the project. All parties that can impact the successful outcome of a project should buy in to the project outcomes and performance goals attached to those outcomes.

5. Enable the change

Create a culture that supports and enables change when introducing changes to repetitive reporting packages. Initiate change with a concise project plan that includes metrics and milestones, team accountability and ongoing engagement from leadership help ensure success. Uncover what measures and milestone leaders need to make informed decisions and then incorporate them into reporting packages in visually informative ways.

Leaders who intentionally communicate with visual measures will have a greater success rate at achieving their goals. Use the rainbow of ink for visuals that tell a compelling story of your progress and actionable opportunities.

Barker Associates works with leaders to understand and identify meaningful and actionable goals for their organization. We can design indicators to measure progress and actionable tasks to keep your organization on track for achieving goals and executing successful projects.

Marriage Counseling for You and Your Budget

It is the first month of the calendar year and for many, the start of the fiscal year as well. The first month for you to start measuring the results you assuredly planned and documented in a budget for the year.

 

Each of you has a different relationship with your budget. Each of the components of this relationship can lead to great results or negative ones, depending on how you react to them. Your reactions can impact your personal career as well as the health of the company you own or work for.

 

Read more about some of the pitfalls of budgeting and how to enhance your relationship with the budget to achieve the great results for which you planned.

Marriage Counseling for You and Your Budget

 

CEOs, Presidents and Executive Directors

If you created the budget while sitting with your accountant, made sure you were comfortable with the revenues and expenses, but have not communicated it to the managers and leaders of the organization, you have just cheated on your budget. My counsel is to get the budget in a presentable format to communicate to those who have a chance to manage day-to-day to help you achieve the results forecasted in the budget.

 

The message to your managers should include your overall strategy, backed by practical, measurable goals.  Your leaders need to believe in your strategy because if they do, your job of leading the organization to positive results will be so much easier.

 

I repeatedly hear, in large and small organizations, from managers, supervisors and those on the front line, that they have no idea what the monthly budget is for repairs to equipment, printing costs, etc. They are spending money based on one decision at a time without the benefit of the overall strategy. Without involving your managers in the process, you are not benefitting from their knowledge and experience.

 

Nonprofit Executives and Finance Committee Members

Can you answer these questions? If not, your budget package needs work.

 

  • How much does it cost the organization to run each program? Of that total cost, how much is covered by actual funding commitments and how much has to be raised to maintain the program(s)?
  • How much of your administrative cost – Finance, Accounting, Development, etc., is funded by direct reimbursement and/or the de minimis administration expense reimbursement in grant budgets? How much money has to be raised to cover these costs?
  • Does the budget package have one column for the Net Change in Assets/Income Statement and no backup schedules to show the Revenues and Expenses by program and grant? If your answer is yes, the budget package is one-dimensional. In other words, it does not provide the fundraisers and the Board the needed information to interact with potential donors and speak intelligently about the real needs that are met through fundraising. Many nonprofits go under when they issue one dimensional budgets to Finance Committees year after year. There is no clear understanding of the true funding requirements. Your fiduciary responsibility should lead you to ask for more transparency regarding where the needed funds for programming and administration costs will come from.

 

Finance and Accounting Professionals

Did you manage the budget process so that the budget is constructed the same way the detail accounting entries are made month-to-month? Most non-finance professionals hate to deal with anything that has “Budget to Actual Variance” in the description; add to it that you are explaining that the variances are because the budget has one type of accounting and the actual has another, and you are sure to cause irritation that is just not necessary.  It is like a spouse putting the toilet paper on the roll backward – it is irritating and just not necessary.  It is your job to keep the conversations and analyses about real differences and tie those differences to a real discussion that empowers the team to react and strategically move the direction as planned or make a decision to pivot. Here are some pitfalls to avoid:

 

Differences Between Finance and Payroll Practices

Large and small organizations find themselves with the ineffective comparison of budget-to-actual salaries, caused by Finance dividing the total annual salary by twelve for the monthly budget.  Payroll records the true payroll expense. Month-to-month variances result, as Finance budgeted for a full twenty-eight to thirty-one days and Payroll budgeted for twenty-eight or forty-two days depending on whether it’s a two or three pay period month.

 

Insurance

Insurance is typically paid in advance for the quarter or year. If it is material, it should be set up in a Prepaid Account. If insurance bills are expensed as paid, the month variance could be a result of those payments and not an actual expense overage.

 

 

Annual payments for subscriptions

These payments should be reviewed to determine materiality; determine if they should be set up in a prepaid account when paid, or if they are immaterial and should be expensed. When you mirror the actual accounting and the anticipated expense pattern in the budget you can avoid unnecessary variances and questions.

 

Sales Revenue

A company that is anticipating a large increase in revenue should determine how the increased sales and related cost of goods should be spread throughout the year in the budget. Consider the current pipeline and sales cycle when budgeting sales revenue. If your sales cycle is 120 days and there is $1 million in your pipeline at the end of the year, you will not realize $3 million in sales in the first quarter.  A fast-growing entity could possibly reach $12 million in sales for the full year, but it should not be spread evenly to each month. Patterns such as this will frustrate executives and sales staff and make them feel like failures. This would be the equivalent of us expecting our spouse to be Jeff Bezos and to increase our family’s net worth at the same rate.

 

Operations Executives

Make sure you are empowered with the right information to effectively run your department.  Do your best to work with accounting to submit invoices and information within their deadlines so they can process the data into information that you can review and use to communicate effectively with the leaders of the organization.

 

Try to manage potential budget cuts made throughout the year so the troops can stay focused on driving the overall strategy of the business.

 

Think of it like this great example in the Netflix series House of Cards (spoiler alert if you have not begun your binge watching of the series – sorry).

In this episode, Frank becomes President and wants to take funds from FEMA to fund a jobs program to put people to work.  The head of FEMA does not resign and tells his colleague he is not going to resign, as he is the only one who can manage the reduced funds and help those in need if a hurricane does hit after Frank took all the budget money. While the drama is critical for a successful Netflix series, you don’t want a similar drama playing out in your company!

 

Good luck with your relationship with the budget. Use my advice to help manage your fiduciary responsibility to the organization, as well as your duty to manage your career. Avoid the many aspects of “marital irritation” I have discussed by correctly managing Budget-to-Actual variances.

If you would like to discuss your relationship with your budget directly with me, please sign up for a complimentary 30-minute session through the contact link here.

 

Instant – Not Always Good

Instant rice and online banking have a lot in common. Instant rice is obviously quick, providing you with an immediate result. It works really well for casserole recipes or for certain dishes where rice and other ingredients are mixed together. But if you are serving dinner guests or in a fine restaurant, you expect the chef to put in the extra effort to serve gourmet rice prepared in an exotic way.

Don't just rely on point-in-time views. Take time to reconcile accounts.

Don’t just rely on point-in-time views. Take time to reconcile accounts.

As with instant rice, online banking provides instant information regarding your bank balance, making it a great tool for certain situations; however, if you want to use it as an effective tool to manage your daily cash flow, it requires the extra effort of being connected to a cash reconciliation process that is properly maintained and reviewed periodically.

 

Before the days of online banking, the standard practice for both personal and business checking accounts was to reconcile a check register to a monthly bank statement. When accounting professionals adopted online banking into their processes, organizations tended to forgo the discipline of maintaining a check register as part of their reconciliation processes.

 

The following is a typical conversation I’ve had when consulting with clients on accounting process improvements:

Accounting professional, with a bundle of unsigned checks, “This is our process for obtaining check signatures.”

 

Me, “How do you know you have enough money in the account to cover these checks? What is your procedure?”

 

Accounting professional, “I checked the balance on line this morning.”

 

Me, “Where is the reconciliation to the check register? How do you know that all of the uncashed checks will not deplete the entire balance?”

 

Accounting professional, “I know there are not that many outstanding checks.”

 

Me, “When is the last time you reconciled the account?”

 

Accounting professional – answers range from a year ago to do not remember (not good) – to yesterday or a month ago (which is good).

 

As with using instant rice, there are times when viewing online balances without going through the reconciliation process are appropriate, but it’s not the final reconciliation tool.

 

Let’s try an experiment: If you are a CEO or President of an entrepreneurial company or a Finance Chair of a non-profit, ask the accounting department for the latest bank/cash reconciliation of the operating account. Ask specifically for these documents:

  • The bank reconciliation
  • A copy of the bank document to which it was reconciled
  • The Balance Sheet balance to which it was reconciled

(Note: Publicly traded companies, financial institutions, insurance companies and other regulated industries have to maintain reconciliation procedures, so if you are in charge of one of those, regulation will take care of this.)

 

If you are bold enough to move forward with this call to action, my experience tells me about 50% of you will get a reconciliation completed in the last 45 days. If you get one and do not know how to review it, contact me for a free, no-obligation checklist that will guide you through a high-level review. If you do not get a reconciliation, and, in fact, get a blank stare from your accounting person, contact a financial professional to complete a review of your cash procedures and process. You may have plenty of cash flow today – however, that can change quickly if you do not appropriately manage it. Don’t risk finding yourself in a position where you cannot meet your basic financial obligations. “Cash is king” is a cliché’ for a reason – it is a requirement to run almost any type of business.

 

Mindy Barker & Associates works with entrepreneurial business owners to empower them with the tools and financial information to improve company value, profitability, and cash flow. To find out more on how you can be empowered, contact them today at cfo@mindybarkerassociates.com, or call 904.728.2920.

 

Why is Preparing a Budget Without a Balance Sheet and Cash Flow Like Driving a Car in a New City with an Old GPS?

Cars built in the early 2000s that had a built-n GPS required periodic updates using a CD with new roads and street addresses. If you are still driving around with a GPS of that era, you already know that when you get to a new construction area, the GPS will confuse you more than help you get to your destination. This analogy is similar to preparing an annual income statement for a budget without updated information. iStock_000019083488_LargeThe annual income statement will show the projected revenue and expenses – but will leave out critical pieces of information vital to the day-to-day planning of a business. Here’s an example of what I mean: revenue is highly seasonal but expenses are spread throughout the year, causing issues with covering expenses month to month. Actual cash flow and the ability to cover debt service payments are not analyzed solely with an income statement. Another example: internally developed software can cost a lot of money; the cash required for the development is maintained on the Balance Sheet and not the Income Statement.

Lack of proper planning and analysis, and failure to prepare a projected-by-month Income Statement, Balance Sheet and Cash Flow can lead to an unplanned cash crisis. Please contact Mindy Barker & Associates if you would like to have your budget process reviewed to determine how you can avoid such crises each month.