Your accountant doesn’t know your business.

Many business owners outsource all their financial decisions to their accountants -  or worse - their bookkeepers.

Since they’re the ones that record the numbers, they should know what to do to increase business performance - right?

“He’s my numbers guy, of course he knows what to do to improve the business.”

Ask a simple question, such as “Why are our gross margins shrinking?”

You’ll either get a blank stare, or a generic answer like “because our bad debt is higher?”

Thanks Toby, that’s really helpful..

It’s not their fault. 

Accountant’s are often pushed into an advisory role by the small business community out of necessity. They are often the only ones in the business that do anything with financials.

But their job is to accurately capture the financial transactions of the business. Asking them to do anything else is outside of their wheelhouse.

That’s where finance comes in.

The job of finance is to take the numbers prepared by accounting and determine the key drivers by combining financial data with non-financial data. Within the content of the business’s strategy and goals, they highlight what went well, what went wrong, and what happens if it doesn’t get fixed. 

Going back to the simple question of “Why are our gross margins shrinking?”

Finance would provide an answer like this:

• The Problem

  • “Our gross margins are shrinking because bad debt is out of control.”

• The Cause of the Problem

  • “This is due to a system limitation that prevents us from getting proper insurance verification when patients check in.”

  • “Failure to get the proper insurance verified has led to higher patient balances - these are far more challenging to collect compared to commercial insurance payers.”

• The Solution to Fix the Problem

  • “As part of our bad debt reduction plan, we’ve begun piloting a new tool that will verify the patient’s insurance in real time. It also allows a credit card to be on file so we can bill them their patient responsibility.”

• The Financial Implications

  • “Since bad debt has a 6 month lag, we won’t see the reduction to bad debt expense immediately, but we should start to see an increase in upfront cash collections within the clinics implementing the new tool.”

  • “This will let us know whether the pilot is working. We can expand to more clinics knowing our cash collections will tick up immediately while the reduction in bad debt expense will impact the P&L 6 months from now.”

  • “We expect the new tool will reduce our bad debt by 20% conservatively. These savings more than pay for the new tool’s cost. This will improve our gross margin significantly.”

That’s far more informative than “Bad debt is higher”.

The purpose of this piece is not to shit on accountants. Without them, finance is useless.

Accounting and Finance work hand in hand to give business owners the data they need to make sound strategic decisions. 

I’m going to cover how finance operates and how it will take your business to the next level.

Finance Overview

Finance works as the owner’s financial guide. 

The business owner’s job is to set the vision of the company and determine where it’s heading.

Finance’s job is to make sure the business is profitable, generates cash, and doesn't go bankrupt along the way.

Here’s an overview of how the process works.

The Long-Term Plan

It all starts with the long-term plan, also known as the business plan.

This is a 3 to 5 year plan that is updated annually - usually 3 to 6 months before the end of the fiscal year. 

An example is the owner wants to double his dental practice in five years. Keeping things simple, this means going from 5 current locations, to 10 locations within 5 years. The long-term plan would map out what the annual P&L, Balance Sheet, and Cash Flow statements would look like over the same course of time. 

The long-term plan gives high-level guidance for the next phase of the process - The Budget.

The Budget

 A budget is a detailed financial plan for the upcoming year to help achieve the goals set in the long-term plan.

It’s usually created 1 to 3 months before the end of the fiscal year. The budget would give a detailed 12 months view of the P&L, Balance Sheet, and Cash Flow Statements.

To support the long-term plan example mentioned previously - The budget may include one or two additional locations opening throughout the upcoming year. This would likely decrease profitability and cash flow, and increase debt on the balance sheet. New locations require upfront investments and take time to ramp up to their mature profitability. It would be great to open at full capacity but it’s also not realistic. It takes time for new locations to develop a customer base.

With a completed budget, the business now has a guide to measure performance against.

Here’s where the real value of finance is unlocked.

Performance Reviews

Far too often there’s spreadsheet math that looks great after the long-term plan and budget are complete. But the real work is done week by week, month by month to ensure the business hits its targets. It’s far too easy for the business to get knocked off course throughout the year.

Performance reviews are what keeps the business on track throughout the year with changing market conditions.

These performance reviews are done monthly. Finance takes the financials prepared by accounting, combines it with non-financial data, and determines which areas are performing well and what issues need to be addressed.

This helps the business fix issues as soon as possible to minimize the negative impact to the annual plan. 

An example here is the delay in opening a new location.

We budgeted to open a new location in April. It is now half-way through May and the location has still not opened.

The longer this remains unopened, the worse our financials will be. This impact will bleed into future months and years.

Performance reviews give finance additional context to the issues they flag. Example - we can’t open a new location until we fill the remaining dentist role. Without it, we cannot see patients. With this context, we may plan to spend unbudgeted recruiting dollars to help fill this role. It looks like the additional spend will cost less than the money we lose by remaining unopened. 

These recurring performance reviews allow the business leader and finance to align on a clear action plan to course correct. Finance can alert business leaders the financial implications of not fixing the issue and what the financials will look like for a given proposed solution. 

After a clear action plan has been developed, finance can forecast the future financial impact of the new plan.

Forecasts

Forecasts can be broken into two primary sections.

First is the short term forecast. 

This is commonly referred to as the 13 week cash flow forecast. This is one of the most powerful tools a business owner can use to drive future performance. Cash is not king if your future cash flow is negative. By reviewing this weekly, you can make adjustments to ensure you have the proper amount of cash on hand to meet future obligations. The big ones that always trip business owners up are cash outflows to pay your extortion fees to Uncle Sam, loan payments and owner distributions since those are not captured on the P&L.  

The second primary section of a forecast is the remainder of the year. 

This forecast is used to compare to the budget. It’s often done quarterly. Examples are a 3+9 Forecast (3 months of actuals plus 9 months of forecast), 6+6 forecast, and 9+3 forecast. These are useful to determine where you expect to land for the full year compared to the budget. There’s always a wrench thrown into plans. A business needs to adapt to changing conditions to still hit its original budget targets. These forecasts help show you if you’re still on target for the full year.

Each forecasting method allows the business the opportunity to identify issues and take corrective action as soon as possible. The sooner corrective action is taken, the less negative impact to the business. 

You may have had a rough 1st quarter, but you still have 3 quarters to make up for it.

How to start using in your business

1. Start with a 3 to 5 year long-term plan for your business. This can be as simple as adding 5 locations in 5 years. You can also use growth targets such as we want to grow our revenue by 15% per year or we want to increase our profit margin from 7% to 12%. Use some high-level assumptions for what your financials will look like for years 1 through 3 or 5. 

2. Once you have your long-term plan, create a detailed 12 month budget using the goals and targets from year 1 of your long-term plan. What needs to happen throughout the year to hit those targets from the long-term plan? This may include opening 1 location in June or reduce labor costs by lowering turnover by 15%. Your team should have a portion of their incentives tied to hitting budget targets.

3. Set up monthly performance reviews with each major area of the business. This is the best way to flag issues early and get them corrected to stay on course to hit your budget targets.

4. From the action plan that comes out of the monthly performance meeting, update the forecast for the expected future financial impact to the business. This ensures people are aware of the implications of adjustments made and can alert any issues to address before it’s too late. Make sure to have a short term forecast (13 week cash flow) and a long-term forecast (monthly forecast for the remainder of the year).

Disclaimer: I am not your director of finance, accountant, financial advisor, tax advisor, lawyer or whatever advisor you’d like to label me as. All my work represents my opinions only, not advice. You should always seek the proper advice you need for the financial management of your business