Financial Blind Spots
by Jon Paul
Suppose you are leading a golf tournament and need to decide to play it
safe or be aggressive on your tee shot on the 18th hole, but you only know
your score after 9 holes. Or perhaps you are managing a baseball team and
need to consider pulling your starting pitcher in the 7th inning, but you
only have the score after 3 innings.
We know that wouldnít happen in sports - decisions are made with up to date
data. However, that happens often in business. I call them financial blind
So why bother? Why care? Because smart business owners who make decisions
based on bad information get sub par results. What follows are several common
business ďblind spotsĒ that can put your business at risk.
- Overall Results.
My consulting practice is focused on companies under $50 million in revenues.
In about 70% of the cases, I find that the financial statements are misstated
and have to be redone. Itís just that the numbers are off, nothing fraudulent.
The profit and loss could be overstated. There may be unusual swings between
monthly results. Key liabilities could be missing. Some assets may be overvalued.
The numbers may be just hard to make sense of or come in very late after
the month end.
So, what causes some of this? One thing can be using cash accounting when
really accrual accounting would be much more appropriate. Another thing
could just be poor month end cutoffs and accruals. Another factor can be
focusing on the profit and loss statement and not paying enough attention
to the balance sheet. It could also be that the staff is not qualified and
the outside accountant isnít going deep enough to understand the situation.
Whatís involved is not getting down to a deep enough level, going beyond
the fundamental financials in order to get a deeper understanding of how
the company really operates and is really making their money. It could be
by customer, product, division, territory, sales rep or other grouping.
So, what are some lessons about margins? First, track margin not just revenues
in your management report. Secondly, get a sense on what channel the money
is made in, in your business and, perhaps, see if youíre in the right spot.
Third, have a very good cost accounting system. You need that in order to
have confidence in your numbers. Fourth, balance your margins with risk
and make sure they fit. Last, remember the turnover side of the equation,
as turnover can help margins too.
- Internal Focus.
This is where the company has a cost-plus mentality and is very tied to
past practices without having a good look for outside validation. As a result,
it could be missing on some significant opportunities for higher margins.
- Capital Needs.
How much capital is really required? How long will the money last? What
kind of structure should it be? The firm also could be missing out on understanding
how to value any equity coming in and how long does it take to raise the
capital. In particular, it is also making sure that the capital will make
a long-term change in the company, not just get the company deeper in the
- Working Capital.
This blind spot means the company has too high accounts receivable or inventory
levels. A lack of people to follow up could be missing, as well as key drivers
to determine the right level of working capital. It may not be getting enough
support from the top. Sales and purchasing policies may be made without
considering the impact on working capital. Finally, nobody may be really
looking at the working capital cycle.
- Income Taxes.
Nobody likes to pay more in taxes, but it still happens. Company might miss
out on deductions or they take action too late to do anything, after the
year is finished. They may fail to bring in good tax help to review their
taxes or be missing documentation, which makes the job difficult for the
tax advisor. Bad reporting from accounting could also lead to incorrect
- Financial Staff.
The financial staff is not adequate to care for the financial needs of the
company. They may have the wrong person in charge, such as outgrowing someone
who has been there a long time. It might be somebody brought in from a different
industry or size of company who isnít catching on. Sometimes theyíre missing
a head of finance. Also, it could be the staff hasnít been fully developed,
missing someone to mentor and train them. Finally, they could be relying
on an outside accountant who lacks the time or operating experience to really
get deep into the operation.
- Financial Systems.
The company system just may not fit their particular industry. The computer
system might fit the industry, but too small for their size of company.
Or, the opposite, the company has been enamored with IT and way overpaid
for a cumbersome enterprise system. Another fault is that the selection
was very finance driven, rather than sales and operations user driven, so
it is not getting accepted.
- Cash Flow.
While perhaps most important, this is mentioned last, because the other
blind spots all feed into this one. One cause is not knowing the current
cash position. Another is not having a cash flow statement of the financials
and really understanding the nature of the cash flow in the business. There
could be a lack of a short-term cash forecast, so as a result the company
gets blind sided by cash squeezes every so often.
Itís unlikely youíll be hit by all nine financial blind spots at one time,
but there could be a couple lurking. Give your firm a checkup on these with
the help of an outsider.
Keep your business vision sharp, so you can have the information and resources
you need to make smart decisions and execute them.
Since 1992, Jon Paul has brought new insights on company results to presidents
and helped them drive superior results with his strategic and tactical guidance.
As head of Value Added Finance Resources, Jon turns the finance area at firms
into a value added resource that propels the rest of the company. He draws
upon past successes in dynamic situations like hyper-growth, turnarounds and
startups in a wide range of industries. For more information, please visit
or contact Jon Paul at Jon@ValueAddedFinance.com
more articles in The CFO Refresher in the Refresher