You Have to Be Fiscally Responsible

“Friends don’t do this to friends.” – quote from a new client CEO when told his CFO was “taking” money.

For those of you who follow this blog regularly, you know my background as a long-time audit partner with EY. That experience has allowed me to be a trusted advisor to many business owners of all types and to see first-hand the issues I use as content here. I use few, if any, “geeky technical topics” and I usually leave the ugly side of the business out. But there is a disturbing trend I see with too many of this generation’s entrepreneurs that I feel is worthy of exploring. First, let me provide some background.

There is a popular acronym called KPI (Key Performance Indicators) that many owners today rely on to gauge the health of their business. KPIs may include average sales per day or employee, days of sales in receivables, unique users to a site, etc. Many come into favor as early-stage companies may not have revenue but need some objective data to monitor progress. All understood. But this tool is not so new. As a young manager (yes, before the internet but not quite when people used quill pens), I was always interested in what data owners of established businesses used to manage their company. Interestingly, while some referred to monthly financial statements, most used daily information on shipments, cash collections and weekly payroll. As to the last item, even the most unsophisticated owners always knew their weekly “nut” or payroll. They would leave the full accounting and finance function to the CFO but they always had a handle on KPIs. So why the trip through accounting history?

I notice more and more a bifurcation of tasks and responsibilities by today’s entrepreneurs. Once a financial manager of any type is hired, it seems everything finance related is delegated to that hire. Someone in an owners’ blog somewhere must have said this is the right thing to do; that administrative tasks just bog you down and you should abdicate your fiscal responsibility and only spend time on activities that bring value (product development, team and customer building, etc.) to make your venture a success. Not true.

So, the genesis of this quote. We recently landed a new early-stage client and as part of our process did some simple diagnostics. The CFO was a close friend of the CEO founder with complete charge for finance and a few other functions. Without going into details, the CFO was paying himself unauthorized bonuses. No accounting tricks; they were right there on the payroll register; the CFO just felt he deserved more money. We were astonished to find the founder never reviewed payroll; did not know what his nut was. He was devastated. In addition, the bond company is giving them a hard time about covering the shortfall citing inadequate supervision.

So, a simple lesson for owners of all businesses. It is perfectly fine to leave the core of the finance function to others but always have some minimum KPI type of checks and balances in place as your predecessors did. Take the advice from Chris Anderson as relayed in David Kidder’s “Startup Playbook” – “engage in the whole process.” Because in the end, it is a real challenge to be a success if you are not fiscally responsible.

When Should You Build a Back Office?

“No time left for you” – lyrics from the song No Time by The Guess Who

I tend to blog about recurring points made in meetings and conversations following the belief that if I hear the same topic from a few people in my little world, maybe there is something happening on a larger scale. So, in the last few weeks I have had the occasion to meet with four different early stage investors (A round types). As is my normal approach, I asked each what were trends they were seeing in potential investees. Expecting to hear the typical “investors have unrealistic price expectations” or “business models that were not viable”, I was shocked to hear three of the four raise concerns regarding the inadequate development of prospective portfolio companies’ back offices. I could not believe the lack of appropriate (pardon my accounting jargon) overhead had even made it into the list of the top fifty items that concerned them. I must admit it was consistent with what we see in the market; almost every early stage company we see has no time (or money) left to even think about their back office.  Being somewhat intrigued by all of this, I decided to probe a little deeper.

What each mentioned was their disappointment in being able to get answers to the most basic of financial diligence questions, never mind being upset that there were no processes in place to track Key Performance Indicators (KPI’s). While none admitted to “passing” on an investment due to this shortfall, I did get the distinct impression that it was seen as a bigger negative than I thought. So what is the problem?

The back office (or overhead) is something most early stage entrepreneurs have no desire to spend either time or money on. As the lyrics to this song go “on my way to better things.” Most believe there is always time to backfill later and a back office does not drive revenue. I cannot tell you how many projects we do reconstructing financial information at a cost many times what some basic processes could have easily covered in the first place. My concern is always how many bad decisions may have been made because of incorrect or incomplete information? As one investor stated “if they spend no time understanding the business now, what are they going to do as it grows; will they see the information indicating changes that are required before it is too late.” This is not just data clean up; it is lost opportunity.

Here is the good news; reasonable solutions are available at least in the NY Metropolitan area. There are flex work solutions for accounting staff, CFO’s and experienced mentors and advisors who can point you in the right direction as well as reasonably priced tools. You just need some help from your advisory team and they can get you on the right track. I would never want a client not to get financed because his or her back office was a mess. Please do not allow a controllable item like this prevent you from achieving your goals. The time to fix it is now.