After you interview the company, gain a better understanding, and start your action plan, you then should take a deeper look into financials. You always want to make sure the accounting system is clean.
You can’t be a good financial leader if you have bad numbers! You have to have a good foundation, with good accounting systems and records in place. Garbage in, garbage out. You can’t analyze garbage numbers and come up with anything meaningful. If you have a great system, that’s awesome! You can skip this step.
So the first thing you should do is organize your accounting information so you can develop the right metrics.
But what are good metrics?
Normally, we like to have an economic picture in mind of how the company makes money before we go any further. We ask them, What are your economics? If we’re sitting down with a CEO or controller of a company and having a beer or a glass of wine, we’ll ask… Can you quickly write down on a cocktail napkin your company’s economics and how you make money? Generally, the CEO can. Sometimes, operations and sales can. But rarely can anyone tell us accurately how they make money. Often no one, including CEO, COO, or Salesman, really relates it back to the financial results.
Traditional financial statements have been around since before the 14th century. Generally, Accounting isn’t very progressive. You wouldn’t drive a car looking out the rear-view mirror. You need to develop tools to look forward.
One of your problems you might have is, usually you don’t prepare your financial statements until the second to fourth week of the following month. You could be losing money weekly for the first two or three months, make money, but in the end be losing money for the previous 6 weeks and not find out until the next month. In that, you need to develop a flash report or dashboard.
How do you know if you have a good accounting system?
1. You’re able to close the books within 2 weeks of Month End (ME).
If you can close within a week to 10 days, that’s good. Great is 3 days or less.
2. Have less than 10 adjusted journal entries at Year End (YE).
This tells us a lot that you’re not having to clean up a bunch of journal entries.
3. Be 95+% accurate on your Profit and Loss Statement.
The trade-off you’ll have on organizing the accounting system is accuracy vs. timing. If you give your accountants 4 weeks to provide financial statements after a month-end, and they don’t have to finish it for 4 more weeks, they can make them very accurate. If you give them 6 months, it will be dead-solid perfect. That’s why most auditors don’t come in 2-3 months after year-end, because they can look at transactions on both sides and make sure you put the right things in the right bucket.
Conversely, as a financial leader and operator, a month to two months seems too late. You’ll be looking too much through your back mirror when most CEOs are three months ahead of where they are today. Accuracy is a major tradeoff in this relationship, because a financial statement done in three days won’t be 99% accurate compared to six months of work.
The question you have to ask yourself is: Does it matter? Other than the year-end statement, the purpose of a financial statement is to help you make decisions going forward – to help you look through the windshield rather than the rear-view mirror. If you’re four weeks behind, the CEO is already a month or two down the road.
That’s why we tend to prefer closing quicker with less accuracy, often where you have to get the management team to buy the same idea. In the end, it rolls from one month to the next.