Managing the Balance Sheet

In these tough times it’s only natural to focus attention on the bottom line. Few organizations have the financial depth to sustain repeated losses. For publicly-held corporations, quarterly performance is routinely summarized as “X” straight quarters of losses as reported in the nightly news.

While this “thumbnail” of performance is not without its uses, ask any good banker or CPA what concerns them more and you’ll find that it’s the balance sheet. Why? Overstated assets and under-reported liabilities mean that any cushion that’s reported in retained earnings is overblown and unreliable. Once an organization is forced to restate its balance sheet, key measures of financial health, such as current ratios and debt-to-equity ratios, can suddenly nosedive. Both credibility and credit-worthiness plummet—not situations that your lender or outside accountant will treat lightly.

Your financial team should be reviewing your assets and liabilities on a regular basis. Ideally, expect them to reconcile major balance sheet accounts monthly or quarterly. Key questions include:

• Do all bank and investment accounts agree to statements from their respective financial institutions, after allowing for outstanding transactions?
• Have inventories been recently verified by physical counts? Does their costs reflect the lower of cost or market value?
• Are fixed assets still on the books that were actually retired in some prior period? Are you capitalizing acquisitions for small equipment that should be expensed instead?
• Are “soft” assets, such as prepaid insurance premiums, still on the balance sheet that should have been amortized or written off?
• Have accounts payable to trade vendors and others been accurately reported?
• Does the company owe vested compensation, such vacation pay, sick pay, vacation or commissions to its employees?
• Have tax liabilities been reported for sales taxes, franchise taxes and income taxes?
• Have prepaid revenues been claimed as current income that should instead be classified as liabilities to be amortized?
• Is your company committed to paying on-going lease obligations that create a significant claim on cash?
• Are your loan and mortgages booked properly?

The above list, while not comprehensive, should give you a starting point for reviewing your balance sheet. While your bookkeeper may not be attuned to these issues, your controller and your tax preparer should. Be sure you have ethical and competent professionals to keep your balance sheet reliable throughout the year.

Cash Flow What?

Your CPA will always include a statement of cash flows when issuing reports on your financial condition—it’s a requirement under GAAP, those generally-accepted accounting principles that for many years have brought standardization and uniformity across industries. A statement of cash flows basically adds balance sheet changes to net income to illustrate how the organization has provided or used its cash and cash equivalents over the period (usually a year).

CPA’s will argue that the statement of cash flows holds real value for business managers, and you can even find a course or two that teaches how to understand and utilize them. Recognize however that a statement of cash flows, like your income statement, acts as a journal to tell you where you’ve traveled.

When times are tough, cash is king. You want to be pointed forward, scanning the horizon for opportunities and challenges, not backing out of the driveway by means of your rearview mirror. That’s where a cash flow or financial forecast comes in.

The cash flow forecast evaluates your expected receipts and disbursements based on assumptions about customers, sales, inventory movements, asset purchases, operating expenses and taxes, to name the most common financial activities. A good financial forecast gets to the heart of your organization’s business model by asking such questions as:

• Do we have sufficient inventory to carry us through the next period without substantial investment?


• Will our major supplier keep the pipeline full?


• Can we expect our customers to pay within terms?

A statement of cash flows typically fails to generate this level of discussion, much less inform the reader concerning future cash position, so most organizations will find the need to produce financial forecasts too.

You’ll want a financial manager who understands how your business works when it’s time to prepare financial forecasts. A skilled professional will not only ask the right questions to capture the essence of your business model and incorporate it into the forecast, but will also make recommendations for change—provided the right atmosphere. A back-of-the-envelope request will engage a very limited discussion of assumptions and expectations, while a detailed financial forecast will examine all the “rocks”.

Expect your chief financial officer to take an active interest in your operations. If he’s locked in his office away from marketing, engineering and operations, his scope will be as narrow as his four walls and he’ll miss key assumptions when called upon to produce financial forecasts. This same deficiency will afflict your budgets and business plans too. You need an accountant who will prepare financial forecasts that convey the way your business really works.

We Train Accounting Teams to Earn You Dividends

WHY TRAINING COUNTS

A well-trained accounting staff is the bedrock of any accounting department. Lack of training leads to repetitive questions, wasted time, faulty communication and unnecessary errors. Sure, it takes time initially to train your team. Furthermore it takes time to mentor and coach them once that initial training has passed. Like any investment, the more you deposit on the front end the greater the rewards you can expect to reap over time.

It can be a real challenge borrowing from the “doing” bank to invest in the “training” bank. Training and education are typically among the first line items to be cut when cost control rears its head during tough times. We tend to consider training as a luxury reserved for only the most favorable business conditions. The result is that training becomes sporadic and hand-me-down, with your incumbent staff passing on bad habits to your newcomers. This is especially true for employees breaking in their replacements under rigorous time constraints.

What does good training achieve? First, it establishes a common language between teacher and student, provided the teacher is suited to the task. You need a teacher or trainer who can express ideas clearly and with patience. Some students grasp a concept immediately, while others need examples, diagrams and even practice problems . Avoid the teacher who uses jargon without explanation or who jumps to the next principle without ensuring that the student fully comprehends what went before. We’ve all been known to signal “I got it!” when what we really mean is, “I’m losing interest!”

Second, good training can unearth both changing business conditions and just plain bad procedures. If trainer and student are really hearing one another, it’s not unusual to discover that how it’s done isn’t necessarily how it was meant to be done. Good teachers will invite their students to explore with them how and why practices have shifted away from the standards that should have been in place. Because the good trainer never stops learning herself, she may find that the accounting staff has changed its procedures to match real-world conditions that were never anticipated when its systems were first introduced.

Third, good training provides a context for the student. If the student can relate the surrounding conditions to a particular practice, he has the tools to evaluate similar conditions. Is “B” close enough to “A” that we handle it the same way, or is “B” more like “C”? So much of learning is extrapolation from one situation to another. Be generous: Give your staff the skills and the confidence to find their own answers by providing the training they need.

If you need assistance with accounting staff development and training, seek out experts who can both “teach” and “do”. Has your trainer been a “best boss”? If so, chances are she makes a good teacher too. Ask your business network for referrals and surf the web, but get references no matter what your source. A qualified trainer will be happy to oblige.