The Key to Effective Delegation: Clear Communication

Male and female coworkers discuss work over a laptop.

Delegating effectively can lift the performance of both you and your company. Strong delegation skills are a vital tool, offering benefits for both the person who delegates and the team member delegated to. However, not all delegation is effective. Here are the common traps and how to avoid them.

Dear CFO,
I keep trying to delegate work to my staff, but they either do it so poorly that it’s easier to do it myself or they ask so many questions that I can’t get anything else done anyway. How can I use better communication for more effective delegation?
– Overwhelmed by Workload in Washington D.C.

Build Your Effective Delegation Skills to Avoid Delegation Traps

It’s easy to fall into what I like to call delegation traps. You may think you’re handing off work with clear instructions, but it’s easy to miscommunicate. Clear communication is the key to avoiding delegation roadblocks. Remember, not all delegation is effective delegation. Part of building your delegation skills is learning how to give clear, concise instructions that set your team members up for success.

Not sure if you need to work on your effective delegation skills? Check out these common delegation traps and see if you’re falling into them.

The Most Common Delegation Traps: Communication Roadblocks

Woman standing in front of her team, moving post-it notes around on a meeting board.

1. Failure to define the project in terms of the SMART goal.

  • The problem: Instructions given are inadequate to complete the project and will likely result in lost time and energy as the project is fixed along the way. This leads to frustration for both parties.  It’s not patronizing to lay out the instructions clearly and if they aren’t clear, it should be no surprise when the team member has additional questions. A negative response from the delegator, in this case, is both demoralizing and unproductive for the team.
  • The fix: Lay out the requirements for the project in a SMART goal format. Follow up with the specifics on responsibilities, levels of authority, reporting and monitoring requirements. Engage the team member in the process and follow through for more effective delegation.

2. Only the dirty jobs get delegated.

  • The problem: You only delegate tedious jobs which are low visibility or just plain boring. The team member may get the impression you perceive these tasks as below you, leading to low morale.
  • The fix: Show the team you are not above any work by completing some of your own tedious tasks. For those delegated, explain the value of each task and recognize although it may not bring a Disney theme park ride to mind, it’s important. This will make the task more palatable for the team member. Effective delegation skills also include recognizing a job well done, team members are more likely to pitch in willingly when they perceive the value to them.

3. Conflicting priorities.

  • The problem: A critical, high visibility project just came up and you need to delegate. Your top team member is best for the job (this, and many others) and you shuffle their pet project to someone else.  In fact, you are always shuffling tasks around; this is damaging the attitude and productivity of your best team members.
  • The fix: Stop doing this! (Just kidding.) Make sure you establish open communication with your employees, encouraging them to bring conflicting priorities to your attention without retribution. When working as an acting Controller in a manufacturing company, I had a very good and hard-working team member who would always get the job done. I wasn’t always aware of what was on her list of priorities, so whenever I assigned or delegated a new project to her, she would simply ask what tasks on her list could get a new priority.  I accepted her process and we worked together to refine priorities and shift tasks.

Blank post-it notes on a board and a woman's hand moving one note.

4. Too little delegation.

  • The problem: You do not know what to delegate or maybe how to delegate effectively, so you keep doing tasks yourself that really should be delegated. Effective delegation skills are good for many reasons: the growth of your team, freeing up your time to help the business grow, and increasing the effectiveness and efficiency of the team by finding the best person for each project.
  • The fix: Make delegation an acceptable management objective by encouraging delegation at all levels of the organization. Train everyone on best practices to develop a set of strong delegation skills in each team member. Enable teams to focus on the higher priorities with regular communication of those priorities.

5. Lack of consistent policies, procedures, and training

  • The problem: Only one person knows how to do it–whatever “it” is. Delegating is hard, even in a growth mode, if you need to start from scratch on the process each time. Up until now, all of the information related to delegation was for a specific outcome such as a project or a report. While several of the traps apply in this scenario, there is a more basic issue in the day-to-day delegation which must be addressed: How can someone step in for your Controller while she takes a vacation if there are no policies to follow? How can you shift work from your accounts payable clerk when you need her on a short project if there are no procedures for his job, nor anyone trained to do it?
  • The fix: Effective delegation skills rely on cultivating flexibility in your team culture as well as following good delegation processes. Cross-train your team members. Setting policies to allow distributed decision making will benefit the entire team.  In the company I ran, the dispatcher had the opportunity to collect past due rents before sending service. We defined what her operating perimeters (delegation) for settling accounts was and I was involved if the customer would not comply.  It eliminated a bottleneck and increased cash flow. Document procedures to assure consistent job performance, accountability and cross-training is beneficial for all jobs. 

6. Forgetting you are accountable too.

  • The problem: Team members think they can use delegation to abdicate responsibility for various policies, procedures, projects, etc. Or, you may be pursuing a big customer and lose track of the day-to-day tasks. Well-trained team members will operate efficiently and, in most cases, get the job completed.  But, it’s important to remember, you can’t delegate accountability.
  • The fix: Team members need to keep you informed whether you like it or not. Your team needs to know you require active approval of the biggest projects, significant changes in policies (those which change a risk scenario), watch financial and operational metrics and schedule regular status meetings to keep a pulse on the business.

Remember, effective delegation skills are a useful tool to strengthen any team. Building on existing skills and helping develop new ones is the key.  Delegation works best in an environment of open and clear communication where team members can give feedback, ask questions and contribute to the final results.  When delegating, remember it is a learning experience and takes practice to implement.

If you happen to fall into any of the traps, you aren’t alone. Tomorrow is a new day and the perfect time to use these tips to improve upon your delegation skills and foster a better, more productive work environment.


Acquisition Integration Project Management & Planning

Recently, a Project Manager in St. Louis asked me about due diligence and acquisition integration. They were coming into the acquisition process with no previous experience. First, we addressed the due diligence process, but the other piece of the acquisition comes during the integration. Integration project management and planning is vital during this step.

Informing the Project Manager that the company is targeting an acquisition puts the manager in a positive place; this means there is time to prepare for the integration. Keep in mind, while targeting and completing the transaction aren’t the same, if the CEO is actively seeking acquisitions, it’s likely a transaction and integration will happen eventually. So once you get the heads up, you should start considering the integration plan.

Integration project planning has to cross multiple levels of the company to be successful
Image via Burst

Smooth integration requires much integration project planning and the implementation of the plan needs to cross organization lines. To ensure this happens, careful integration project management is required. Once acquired, the plan of the target needs to include input of members from each business by including them on the integration project management team as you refine the integration plan. If your CEO clearly defined the “why” and the “what” of the acquisition, your definition of the “how” will be much easier.

The performance of an acquired business often doesn’t meet the projected value, even in large companies with dedicated integration project management teams. For small companies, successful integration is in some ways easier, although still a huge amount of work. The lead integrators in a small company, usually the CEO and finance, are closely familiar with the business, culture, and employees, which isn’t necessarily the case in a larger organization. Integrating the new business is a more intimate affair in a smaller company and therefore, I believe, the likelihood of success can be greater.

Keep in mind that there are tangible and intangible drivers for implementing a successful integration management plan. Both are critical to success and often only the tangible is addressed in the acquisition integration management and strategic plan. The tangible factors are easier to identify, quantify, and develop tactics for integration. Recognizing the intangible factors is also important and the CEO sets the stage for the cultural integration beginning in the evaluation and negotiation process. Once the deal is done, in creating “day one”. It is likely that you will be responsible for the mechanics of making that happen.

Integration Project Management: Planning for Day One

For day one to go as smoothly as possible, it’s important that the integration project management team works together. If you’re overseeing the process you should be sure to do the following:

  • Coordinate with your CEO on the messaging of the day to make sure it is threaded throughout the areas of your responsibility.
  • Anticipate and coordinate the communications for customers, vendors, and other stakeholders. You may be responsible for drafting these as well, unless you are part of a larger organization.
  • Anticipate and coordinate the press release and social media platforms. An outside marketing & PR firm or internal staff may do the actual drafting and release. Be sure the social media team has announcement content with consistent messaging.
  • Prepare for the formal onboarding of new team members. Coordinate with all team members for appropriate introductions and conveying consistent messaging.

General Planning for a Smooth Integration

Initial planning for the tangible elements of acquisition involves thinking about all the elements of your business that are everyday occurrences. Much of the integration process is adjusting the mechanics of the combined entity. Again, clearly defining the “why” of the acquisition will help guide the integration project management team with the general planning for the impact on the acquiring company.

Creating an integration project plan from day 1 will ensure a much smoother transition
Image via Pxhere

It is important to remember that the acquisition is supposed to benefit the whole new company. Spend enough time with the acquisition to identify their best practices that you should adopt. Do NOT shoehorn the acquisition into your company’s mold. Both sides have strengths to bring to the table. The more you optimize the culture, learning curve, and operations, the more successful and smooth the acquisition process will be for all employees.

Your integration project management plan needs to start by asking questions on the changes in the business. Based on the answers, the team will then develop the steps to address each issue. Hopefully, the cost side of these questions was modeled in the forecasts you prepared for the negotiations.

Some areas to examine as part of your integration project management plan:

    • CashWill customers change their deposit habits, directing to your lockbox or location? How will you communicate any change and in what timeframe? Will deposit activity change substantially (large individual deposits periodically or a significant volume of small transactions)? What about credit cards and ACH draws from customers or by vendors? Will vendor payments change to your bank or not? What does your bank need to know about any of these changes? Does this offer an opportunity to restructure bank fees? Does your current bank have the capacity to handle the potential changes or do you need a new relationship?
      Develop a timeline, specific steps, and responsibilities to address the answers.
    • Accounts Receivable – Are the payment terms similar to the current terms? Do the customers pay in the same way (ACH, direct deposit, lockbox, credit card)? Are expected customer balances higher or lower than your current business? How do the expected balances support any line of credit requirements? (Keep in mind an acquisition often includes either new banking needs or renegotiation of current requirements.) What are the implications of changes in distribution channels (adding online, a distributor network, retail locations or other)?
      Develop a timeline, specific steps, and responsibilities to address the answers. Notify customers of any changes in invoicing and deposit procedures, addresses or other changes. Address the transition as part of any long-term contracts as negotiated.
    • Inventory Do you have a comprehensive inventory procedure to employ to assure complete and accurate inventory. Will SKUs increase because of the acquisition? Will there be a consolidation of physical space deciding where, when, and how? How will inventory changes influence related costs (rent, shipping, employees, etc.)?
      Develop a timeline, outline specific steps and allocate responsibilities to address the answers.
    • Accounts PayableCan you consolidate purchasing power? How and when will you consolidate? Do vendor balances and expected payments vary from your business (large periodic payments or small regular payments)? How does that affect cash flow and bank balances?
      Develop a timeline, outline specific steps, and allocate responsibilities to address the answers. Notify vendors of any changes in billing and shipping addresses or other information. Address any long-term contracts as negotiated.
    • Debt – Typically, this changes with the acquisition. Do you have new covenants and reporting requirements?
      Develop a timeline, specific steps, and responsibilities to develop systems to assure compliance.
    • Negotiated Compliance – In the case of our acquisition, we had a lookback provision based on the actual revenue from customers in existence at the time of the acquisition. This required specific reporting for a class of customers. Does the agreement call for any specific reporting to the seller (often required with seller financing) or others involved in the transaction?
      Develop a timeline, specific steps, and responsibilities to develop systems to assure compliance.
    • Other changes – This is the laundry list of things that change because of any location, name, or other changes and often this simply means changing who pays the bill.
      • Update licenses (software, naming rights, etc.), leases, contracts, etc. according to negotiated or legal requirements.
      • Determine the use and integration of phone systems, ERP, CRM, or other systems and the transition plan. Obviously, a single line here understates what is involved. The initial evaluation establishes a timeline for decision and change, keeping in mind the 90-day window. Often an acquisition forces an upgrade in the systems due to volume and or changes in complexity. In the meantime, what actions are required to keep things running?
      • Change of physical space – Often there are long-term lease commitments to deal with. For example, in an acquisition that we did, we were responsible for some high rent space that no longer suited our needs. We moved to a new location (another set of to do’s) and sublet the space. While the sublet payments didn’t cover the entire cost, it did defray the out of pocket expenses. Consider areas you’re integrating two office cultures (which should have been a primary consideration in the acquisition decision), one location’s modern office space and the other’s dingy old warehouse, may breed discontent. It may mean your office space needs an upgrade.
      • New location – The outcome of the acquisition may mean relocating a distribution center more centrally or eliminating excess/redundant facilities. The complexity involves personnel, logistics, notices, etc. During integration project management and planning, the move and/or elimination timeline should begin within the 90-day window, thereby setting expectations. The plan itself need not be complete in that timeframe.

General integration concerns to be aware of:

  • If the reporting entities remain separate, define the allocation of the costs of any of the above.
  • Define the change in each team member’s role. Define the integration of new team members. Are there opportunities for growth on the team?
  • Communication styles play a big role in setting new team members up for success during the restructure. Using some initial testing (DiSC, Myers-Briggs, Culture Index) may help in smoothing potential communication missteps. Your management team can communicate in the way the new team member needs to hear it.

Initial definitions of the “why” and “what” of the integration will help your integration project management team to direct the initial planning. Comprehensive due diligence during this phase will lead to a smooth integration. Remember, this is a team effort and the successful integration is not fully on your shoulders… although sometimes it may feel like it.

If your company is going through an acquisition, you may need further help in the integration. I offer a 2-hour free consult and would be happy to help. Reach out and let me know how I can guide your acquisition process.

Featured image via Pxhere. All images licensed for use via Pxhere and Burst licensing.

The Importance of Due Diligence in Acquisitions and Mergers

When your company is going through an acquisition due diligence is vital in all areas. Here are the most important points requiring due diligence in mergers and acquisitions.
Dear CFO,
Management is currently targeting an acquisition and I’ve been told I will be in charge of the project plan for the acquisition due diligence and subsequent integration of the business. This is a new experience for me and I am not sure where to start.
Finance Manager in St. Louis

It is wise to seek help during the acquisition process. The good news in your question is that management is just targeting an acquisition. Since seeking an acquisition is often a very confidential process, gathering data and setting up the plan as a “preparation for a potential acquisition” is a good cover. This gives you time to actually plan and seek input from the various departments within your organization before the acquisition takes place. Often times the acquisition due diligence and integration are an afterthought of the “hunt.

Keep in mind, participation in acquisition due diligence is often quite limited due to the confidentiality involved in seeking and evaluating an acquisition target. Make sure your CEO or Corporate Development Team clearly defines who can and will be involved in the process. Often outside firms are used during the due diligence process to avoid rumors of the sale disrupting current operations of either business. If your CEO clearly defined the “why” and the “what” of the acquisition, the focus of the acquisition due diligence is clearer.

Acquisition Due Diligence

The main objective in due diligence in acquisitions and mergers is the verification of the thesis for the acquisition. Typically, the objective of acquisition due diligence is verifying the business representations of the seller (financial results, market penetration, customer satisfaction and continuity, vendor availability, production/service capability, distribution channels) as well as identify “skeletons in the closet” (outstanding warranties, lawsuits, insurance issues, customer concentrations, vendor reliance, a new product by a competitor, or unfavorable contract clauses, to name a few).

The results of due diligence in acquisitions and mergers may reframe the negotiations or actually kill the deal. If the Letter of Intent (LOI) is well written and there is a joint vision, surprises in due diligence can often be overcome without killing the deal. This is why strategic planning is so important. Involve your outside legal and business advisors to create a comprehensive acquisition due diligence plan. Experienced advisors will point out gaps in your process and provide tips on specific areas needing attention. You know a lot about your business, so use that knowledge and that of your advisors to form a comprehensive framework, including pertinent tips below.

Due diligence in acquisitions and mergers often starts with the analysis of the historical financial statements and forecasts. In a larger company with audited financials and full footnotes, you can place more reliance on the historical statements themselves. There are additional procedures for all financial due diligence. In a smaller company with internally prepared or reviewed statements, I would suggest additional financial due diligence.

Acquisition Due Diligence Procedures

Bring your acquisition team together to carefully go over the procedures and steps involved in acquisition due diligence
Image via Pxhere
  • Verify that each account on the balance sheet is reconciled, preferably monthly, and review the reconciliations for unusual items, just as you would with your own company’s balance sheet. If allowed, confirm customer balances and aging, and engage in discussions with vendors on payment history.
  • Validate revenue through cash. In a spin-out from a larger organization, the seller represented sales at a level that I could not trace through to cash. So, in my opinion, sales were overstated. As a result, a $1 million look back provision held money in escrow that we claimed when sales did not match the represented amounts.
  • Determine policies and procedures are in place to assure control, completeness, and accuracy of financial information. If these do not exist, focus more procedures on the forecasts and financials to verify the information.
  • Identify the qualifications of the individuals contributing to the financials and evaluate the general level of competence of the staff.
  • Identify activity on the financial records that might lead to other disclosures: legal expenses, rent, or outside services might identify or help quantify risk/exposure areas.
  • Verify all expenses were included in the financials. Often financials of closely held companies are adjusted for the “extras” that the owner took out of the business; be sure that your company will not incur similar expenses. Watch another area of adjustment: the removal of “one-time” expenses (often with further discussion, they are not one-time).
  • Observe service/production and inventory areas for general organization and busyness, paying attention to the workforce and physical characteristics. Pay attention to potential obsolete and unused equipment, work areas, and inventory. Observe the quality and quantity of any finished goods not shipped. A previous client of mine once had significant consigned inventory on-site from both vendors and customers (billed but not shipped). Ask questions to make sure what is on-site belongs to the company and is in use. Often a complete inventory observation is a condition of the sale. Verify that assets on the asset list are physically present and in use.
  • Analyze any forecasts and assumptions thereof with a critical eye in the context of:
    • Historical performance and relationships – if the company claims a new product will bump sales by X%, what is the basis of the claim and have they achieved a similar success in the past? How have supporting costs moved in a similar direction? What is the basis of the cost relationships?
    • Assumptions in the forecast related to the balance sheet make sense. If they are at 80% capacity and increasing sales will exceed capacity, how will they meet the need, expansion, or outsourcing? Is that properly reflected in the numbers?
    • Changes in divisional or product line expectations, especially if they are inconsistent with past performance.
    • Are balance sheet assumptions consistent? If they are going to improve collections to reduce days sales outstanding in receivables, is the strategy plausible and are any associated costs also projected? Will they need more inventory if a new product line is added and have they forecasted that?
    • Ask more questions on anything represented in the business plan that has a financial impact. Clarify both the thought process in the conversion to the forecast as well as the actual inclusion in the forecast.
    • Look for all elements of the business plan (private placement memorandum or another document) consistently represented in the financial statements and forecasts.

Generally, during due diligence in acquisitions and mergers, a buyer will also run their own forecasts using both the seller’s assumptions and adding their own, such as economies of scale, consolidation of positions, etc. Even if the seller recognizes that you will be gaining additional benefit, most buyers try not to pay for what they bring to the table. Keep in mind, although this is conventional wisdom and a laudable goal, in competitive bid processes, buyers are often paying for synergy they bring

Verifications During Due Diligence

Verify acquisition due diligence by carefully going over information and paperwork involved in the process
Image via Pxhere

Even though the numbers are a significant driver of the pricing in the sale, other factors also influence pricing including representations and “skeletons.”  In a small company much of the acquisition due diligence falls under the umbrella of the financial area, so you may be called upon to verify items outside of the financial statements. Thorough analysis of the financials may reveal skeletons and verify representations, however addressing other financial issues often requires independent verification of representations.

Some areas of verification during the acquisition due diligence process are:

  • Customers – To determine satisfaction, look for online reviews, analyze customer retention, or send a survey or other independent means of verifying satisfaction. Customer contracts giving special pricing or long-term commitments with customers should also be factored into your analysis.
  • Market penetration and position – Contact an industry trade organization and seek government or industry reports on the size of the market and new developments in the industry. Compare these reports with the seller’s representation and actual position. Look for new products that are competing within the market. Pay attention to the cliché here – Did buggy whip manufacturers see the end of the market with the introduction of the “horseless” carriage? Think broadly. Remember, only Steve Jobs saw the “need” for the iPhone.
  • Vendors – Determine if the primary raw materials of the seller (ex. people, steel, plastic, or other material critical to the process) are readily available and obtainable through multiple vendors. Also, contracts and purchasing agreements both length and availability affecting the cost of materials come under scrutiny.
  • Employees/Culture – com reviews, compensation and benefits packages, tenure, discipline actions, interviews, and observation of the work areas can all help frame the culture of the organization and the ability to fit with yours. In a large company where I consulted, there were bells to tell people to take breaks, eat lunch, etc. This culture may not bring employees fit for an entrepreneurial environment, or people with narrowly focused or previously micro-managed jobs may not fit an “all hands on deck” atmosphere, as I learned in my organization. In my opinion, we pay too little attention here and it often is the make or break piece of the deal.
  • Contracts – Have your legal team review important leases, software, and other licensing, purchasing, or sales agreements, distributor agreements, insurance, and any other agreements that may influence how you move forward.
  • “Skeletons” – Review legal bills to identify issues, insurance clauses for coverage of product liability, PR faux pas, OSHA reporting, and other inside and outside reporting or contracts for hidden risk areas. Evaluate company performance under various economic conditions. Are they the first to see the impact of a downturn or among the last, and where are they in the cycle now?

Some or all of these factors may or may not be important to examine during the acquisition due diligence. It really depends on the “why” and “what” behind the acquisition, as well as the form of transaction (stock purchase vs. asset purchase), if the company is looking at the acquisition for the short or long-run, if you need it to fill a missing part of your product offering, and so on. Look at all the factors that play a role in the acquisition. Planning your due diligence should focus on what you are seeking to gain in the transaction, but not to the exclusion of evidence to the contrary in moving ahead. Don’t fall in love with the process or the target.

I believe acquisition due diligence should be performed with skepticism. Identify the risk/benefit areas of the acquisition with an objective view and present the findings for deliberation in the negotiations and pricing steps of the deal.

After the acquisition due diligence comes addressing the integrations. For these steps and more important tips to help you succeed in your business, visit the RMR Analysts blog!

Feature image via Pxhere. All post images licensed for use via Pxhere licensing.

Why Should You Forecast The Balance Sheet?

Are your business forecasts missing important information? If you don’t forecast the balance sheet, you could be overlooking important data.
Dear CFO,
Whenever our business does forecasts, the owners only care about the P&L (Income Statement). As the Controller, I want the business forecast and budgets to include a balance sheet. How can I convince them it’s equally important to forecast the balance sheet?  I also need to develop a model to forecast the balance sheet, once I convince them.
Expanding my forecasts, Baltimore

It seems like most entrepreneurs only focus on the income statement. In my experience, that sets up the scenario of unexpected cash flow problems for the business.

As you know, the balance sheet is measured at a point in time and reflects all the assets (what is owned) and liabilities (what is owed). The balance sheet captures the net, representing the owner’s equity in the company or the fundamental accounting equation (assets = liabilities + equity). The income statement reflects activity over time.

Why Forecast the Balance Sheet?

Assets and Liabilities

Income, expenses, liabilities, and many other factors are all involved in forecasting the budget sheet
Image via Pxhere

Auditors typically focus on the balance sheet because it tells the whole story. If you know the beginning and ending assets and liabilities/equity, the income is the difference.

Each account in the balance should be reconciled to supporting documentation at each period end:

  • Cash: reconciled to bank statement.
  • Accounts Receivable: tied to the detail of what each customer owes.
  • Fixed Assets: supported by a list of assets that the company owns.
  • Accounts Payable: reconciled to vendor statements and agreed to the list of what is owed to each vendor.
  • Bank Debt: reconciled to bank loan statements.
  • Other Liabilities: the amounts owed to various sources such as payroll tax deposits, worker’s compensation insurance payments, etc.

By validating the beginning and ending balance sheet, there is a high confidence level in the income statement.

The forecast of income is critical, as it reflects the ability of the company to sell product, pay expenses, and make money. The problem is cash flow. The income statement captures only part of the cash-generation and/or need for cash, the other often over-looked piece of your financial forecast is the balance sheet.

When forecasting the income statement, many of the components have a complementary impact on the forecast of the balance sheet. The income statement tightly integrates with the balance sheet and that drives cash flow.

Balance sheet influences from sales growth:

  • A new customer with longer payment terms (most Fortune 500 have 90+ payment terms) results in increasing accounts receivable.
  • The inventory increases due to more SKUs or faster use of items.
  • Additional equipment purchases or plant expansion to meet the new demand.
  • Increasing repair and maintenance expenses may mean new equipment requirements in the near future.


Another often-overlooked aspect of the balance sheet is the owner’s equity section.

In most small businesses, the amount the owners pay themselves goes through the balance sheet as owners’ draws instead of the income statement as wages. This poses another dilemma when you only look at the income statement. If you don’t have both income and cash flow to support owner withdrawals, the equity section eventually becomes negative because the business is not supporting the amount the owner is withdrawing.

Forecasting the Balance Sheet

Forecasting your business's balance sheet is a detailed process, but when you have the right steps, it's a powerful business tool
Image via Pxhere

As with any forecast, when forecasting the balance sheet, you should start with what you know. You have historical information that you can use to analyze how the balance sheet changes in relation to the income statement. It is critical to adjust the historical information for new assumptions. For example, if the new growth is through a new customer with extended payment terms or if you are moving ahead with higher deposit requirements, that too will affect the balance sheet forecast.

Let’s start with how we might project the various components as we forecast the balance sheet.

  • Cash – usually a fixed dollar amount that reflects “normal” cash maintained in your bank.
  • Investments – often assumed to be at historical levels unless the forecast expects equipment or plant expansion or other cash need to “use” it.
  • Accounts Receivable – using a benchmark of historical day’s sales in receivable, you can project balances. Adjust this for acquiring customers that do not fit your history. For example, if a large component of your new sales is a 90-day customer, calculate what days sales would have looked like if that customer existed in the past and use that in the forecast.
  • Fixed Assets – consider equipment purchases and/or plant expansions. If you are operating at 80% of capacity and the projected sales growth takes you to 120%, anticipate the expansion with an estimate of the costs of the expansion. For an annual forecast, don’t worry that it may be a longer-term project or break it down year 1, year 2 etc. Don’t forget to adjust depreciation for the change in equipment, here and on the income statement.
  • Other Assets – since these aren’t normally significant, unless you have information to the contrary, use historical levels in terms of dollars, percentage of assets, or other reasonable correlation.
  • Accounts Payable – benchmarking historical payables, typically as they relate to cost of goods sold in manufacturing or total expenses in a service company, gives a reasonable estimate.
  • Other Liabilities – these typically reflect a single outstanding amount such as payroll deposits, an insurance amount, or a payroll and are not significant. Like Other Assets, these can reflect historical levels.
  • Equity – reflect owner draws and the forecasted income. Owners’ draws are particularly important, as this is the only place on the balance sheet they appear.
  • Debt – Use debt as the balancing item on the “balance” sheet. If you have a Line of Credit or Working Capital line dependent on Account Receivable take the appropriate % of receivable to record the amount of the line. If there are investments that you would rather use, adjust there before determining the amount of debt needed. Once all other balance sheet items are forecasted, use debt as the WITTB (an important accounting term meaning What it Takes to Balance) – or the plug.

Once you have done the detail calculations to forecast the balance sheet – DO NOT forget to review it for reasonableness. No matter how logical your assumptions seem, they may generate outcomes that don’t make sense. Look for them!

It’s also very wise to look at your debt agreements to see if your bank will support your forecast. Don’t project 200% sales growth, if you can’t finance it internally or externally. This is where logic and reasonableness come in.

Income Statement Forecast

Just a word here on the income statement forecast: while many income statement line items can be predicted from relationships to sales or historical relationships (fixed and variable components), most often sales predictions are too optimistic. It’s one thing to set stretch goals and quite another to tell your banker that’s the expectation.

While my bent is very conservative, I have seen too many plant expansions, office building moves, and hiring done in anticipation of the “forecasted” sales only to bring the business to its knees with cash flow problems. The mental and physical stress wears the business owner down and prevents actually getting the sales! Be reasonable.

If all of this sounds too complicated, I have a model that brings this into focus. Visit my website to contact me for a free 2-hour consultation.

Featured image and all post images licensed via Pxhere.

Understanding The Difference Between Debt and Equity

Dear CFO,
The business I run needs an infusion of cash. I asked my controller to analyze the best way to obtain it and he referred me to you. I run a growing small business and in my budget for next year, I am projecting a need for capital to support sales growth and product development. 
Growing too fast for cash flow, Minot, ND

As you’re finding out, growth can be expensive. It does sound like you are at least ahead of the curve by thinking about it now. For a small business, resources for capital are typically limited to debt and equity. Larger companies may also fund capital needs with hybrid forms or venture capital.

Before deciding on the capital infusion, look at your business and decide if you would prefer to slow growth and development for now, so you can bootstrap without the capital infusion.

If you decide you’d prefer not to hinder your growth or lose momentum, weigh the two options of debt and equity and decide which to choose.

Debt Financing for Your Company

If you choose taking on debt to increase your cash flow, you’ll be in the company of 87% of small businesses. Some sources of financing for small businesses include leases, lines of credit, credit cards, term loans, and “Vinnie”-type loan sharks. (A word of advice: Don’t use Vinnie because there are so many ways that borrowing from disreputable sources will get you in trouble.)


Collateral – Generally, the lending institution will require that you pledge something of value (usually business assets) as security for the repayment of the loan. If the loan is not repaid, the lender can sell the assets to recoup the money loaned.

Covenants – Included in the financing documents are typically covenants that require the company to meet certain performance requirements. This might include monthly financial statements, borrowing base certificates, and certain ratio requirements (debt to equity, interest coverage, net income, or others) and other reporting requirements.

Personal Guarantees – In a smaller business or those with a questionable credit history, the owner may have to pledge personal assets (usually a home) directly or as part of a personal guarantee. Avoid personal guarantees if you can.

Advantages of Debt Financing

The pros and cons of debt and equity to help your business are worth considering when making this important business decision
Image via Pxhere

Lower Cost – Except for credit cards, debt financing is typically at a lower interest rate than the return expectations of an outside investor.

No Loss of Equity – The bank or leasing company does not want to run your business. You have full control and don’t need to seek input on business decisions. That is, so long as the decisions don’t lead to violations of covenants.

Matching – You can match the type of debt to the project: a lease to finance new equipment, a line of credit for a short-term shortfall (ex.a large project that has upfront costs), or a term loan to support hiring the new employees to support the growth.

Available to Virtually Any Business with Assets – Since the bank usually seeks collateral for loans, service businesses might need to personally guarantee or pledge other assets as collateral.

Improvement of Business Credit Scores – Similar to building personal credit, timely and consistent payment leads to better credit scores.

Disadvantages of Debt Financing

Disciplined Repayments – A term loan will require that you make the required payment on time each month. A line of credit requires a pay down if the collateral decreases (for example, you are borrowing 80% of receivables under 90 days and that balance decreases).

One-Year Term – Most banks renew the term loans and lines of credit annually, even when amortizing over a longer term.

Higher Interest Rates – A bad personal or business credit history or other influences may keep bank rates high.

Equity Financing For Your Company

Equity financing means that you give up some piece of the ownership to your equity investor. If you are in the friends and family stage, equity financing may be less strident but should still involve paperwork to document the agreement. The amount given up in a non-public company is often determined by a valuation and in a small business or start-up, by the negotiating skills of the parties involved. That may sound facetious, but ultimately equity financing is about what each party believes is the opportunity; we’ve all seen examples of this on Shark Tank.


Sales PitchIt is up to you to identify and sell the opportunity to the potential investor, supporting your ask with historical numbers and/or projections. The numbers should be achievable.

Board or Oversight – If the investment is large enough in the eyes of the investor, they may require a position on your Board or an oversight role in the case of non-performance.

Performance Clauses and Other Requirements – Again, depending on the size of the investment, the investor may include performance clauses for certain margins, growth, income, etc.

Advantages of Equity Financing

Added Input in The Business – Partnership offers many advantages, so be sure to consider the positive benefits of taking on a business partner.

The Value of Your Investment GrowsIf the investment makes a substantial improvement in your growth and profitability, the company gets stronger and the value of your interest grows.

Cash Flow – The cash comes in without immediate repayment terms. An investor usually has a longer time horizon than a bank.

Equity financing might lock you into a business deal that might not be the best choice for your business
Image via Pxhere

Disadvantages of Equity Financing

Loss of Control – Even a minority shareholder can burden your control of the company.

Higher CostThe investor is taking more risk and therefore requires a higher rate of return, which may be in the form of dividends when meeting milestones or with the sale of the business at some point in the future.

Factors to Weigh When Deciding on Debt and Equity

If you’re measuring the pros and cons of debt and equity, here are some questions to help guide you through your decision:

  • How important is the full control of your business compared to the benefits of growth and product development?
  • Can you qualify for debt financing based on your credit history, business history, and/or are you willing to provide additional personal guarantees or collateral?
  • Will there be immediate cash returns from the growth and product development that will enable you to meet the debt repayment schedules?
  • Does your customer base pay consistently and reliably enough to allow you to predict cash flow?
  • Where are you in the business life cycle? Are you in the predictable place of a mature business or the risky place of a start-up?
  • Are you already highly leveraged and additional debt is not available?

In most cases, after weighing the questions of debt and equity, most businesses opt for debt if they can get it. Debt is relatively inexpensive comparatively and equity can introduce a completely new paradigm into running the business. If you’re faced with this decision, remember to consider this caveat: don’t pass up equity automatically. Rather, evaluate equity against your own long-term objectives, your capabilities for growing the business, and the potential it offers. There are plenty of ways to mitigate a cash flow crisis or help your business during a crunch. Consider the merits of both debt and equity as you make your choice.

Featured image and all post images licensed via Pxhere.

CFO Starters: How to Set Up a KPI Dashboard

Wondering how to organize those key performance indicators? A KPI dashboard is an essential way to organize the data in one spot. Here’s how to set up a KPI dashboard.
Dear CFO,
My boss recently came back from a seminar and was excitedly going on about setting up a KPIs and dashboards. Is this a new flavor of the day or are the KPIs and dashboards valuable tools for running the company? It seems it’s my job to start the process of collecting and presenting the key performance data.
Wanting to Make a Meaningful Contribution in Kansas City

I can relate to the “flavor of the day” business conundrum, but KPIs aren’t one of them. The term KPI (Key Performance Indicator) has been around for quite a while. One article described KPI as a term that “some brainiac coined … to help identify details that matter for businesses.” Details THAT matter vary BY business, of course, but there are commonalities. Often, the financial area is an effective starting point for developing KPIs and tracking them within the KPI dashboard, primarily because the financial systems already have a lot of numbers available and benchmarks to compare them.

In fact, whether or not you actually call them KPIs, the numbers you track every day, month, or year are likely KPIs. For example, comparing today’s sales from your POS (point of sale system) to yesterday’s is a KPI. Analyzing the financial statement margins by region compared to your budget, industry, and prior year are the top level of KPI analysis.

KPI Works from the Bottom Up

A KPI dashboard is a great way to track goals, progress, and even where to improve your processes
Image via Pxhere

Rather than identifying a problem at the top level, design your key performance indicators and KPI dashboards to identify the results and issues from the bottom up. Rather than using sales by product line to identify product mix differences within the region, and then further “drilling down” to look at the performance of individuals, a sales dashboard should identify the individual performance, product mix, or another KPI driving the variance. The department head is then responsible for flagging and explaining variances, as well as addressing the plan to meet benchmarks or goals.

KPIs should drive decisions and lead to action. Obviously, the financial department would have limited reach in the above example situation. Senior management must lead, as well as hold all team members accountable.

Common attributes of a good KPI include:

  • Well-defined, measurable information that is readily available or cost-effectively obtained.
  • Measuring a factor that has a direct impact on a specific goal or long-term performance.
  • Effective communication of the performance standards throughout the company, cascaded to responsible departments.
  • Actionable results. You should be able to act on it, holding team members accountable when the indicator digresses from the goal.

Where to Start with Key Performance Indicators

The financial area of your business is often the moderator of the “readily available or cost-effectively obtained” indicator. Frequently, there is so much enthusiasm for the implementation of KPIs that there are too many measures. As a result, it becomes too time-consuming to collect the data and everyone quickly loses interest.

I suggest starting with a few readily available metrics in each department:

  1. Identify 1-3 key performance indicators meaningful to the performance for each level of the company. Don’t overdo it with the number of indicators you take on at once. For company goals, cascade down; for operating objectives (benchmarks), work from the bottom up. Collections and Accounts Receivable may measure accounts over 90 days against a benchmark (less than 5% of total receivables) or a goal (reducing aging of over 90-day accounts to less than 5% of total receivables – thereby expecting a downward trend). Sales might measure against a goal (5 new customers each month or increasing average ticket to $500 or increase close rate to 50%). Check out this smorgasbord of KPI choices to help you get started – don’t pick too many!
  2. Determine the best time frame for setting and evaluating goals/benchmarks. Are you seasonal and therefore monthly goals vary significantly? Can you set an annual goal and expect to capture 1/12 of the goal each month? Do you expect it to take 6 months to reduce the 90-day receivables or is the goal to reduce by the end of the year?
  3. Determine the data elements needed to get the data for your KPI dashboard. For example, does the accounting system age accounts receivable? Is the average dollar value of the ticket available (or the elements needed – the number of tickets and sales dollars)? Is there a sales funnel that measures conversion to sales?
  4. If the data elements aren’t readily available, identify what needs to happen to get the needed data and whether are you able to capture and use it cost-effectively.
    • Review the existing systems within your organization to determine where to potentially capture the data. For example, to measure pipeline, you need to know outstanding quotes. Do you track quotes? If you track quotes, do you “close” them when it becomes evident you aren’t getting the business? Do quotes over x days still belong in the pipeline? Does your system track history to identify how many quotes convert to actual business?
    • The key to readily available data is taking full advantage of proper set up of your systems. What are the capabilities of your systems? CRM systems usually measure the sales funnel (calls to quotes to order). Basic accounting systems often have industry specific processing that can collect data (QuickBooks allows for the classification of quotes – won/lost, etc.)
    • Beware of GIGO (garbage in/garbage out). With any system, there are ways to scam or carelessly enter data. Optimizing the systems to capture data as it occurs increases the likelihood of complete and accurate data. For example, if all sales calls are required to go through the system, quotes prepared in the system, quotes converted to orders, and orders invoiced, there is little room for finagling. The process itself encourages accuracy.
  5. Everyone in the company must understand their role in the KPI implementation and why it’s important. Everyone means everyone: CEO, department head, and support personnel. Senior management must lead and enforce accountability as well as monitor response to variances from benchmarks or goals through a well-defined reporting structure.
  6. Verify the accuracy of the metrics on a periodic basis, as well as the reporting and actions. Incorporate this process into the monthly financial statement close and manager’s meetings at the direction of the CEO.

Establishing a KPI Dashboard to Manage the Information  

A KPI dashboard should be implemented and useful at all levels of your business - from the CEO to assistants and managers
Image via Pxhere

A KPI dashboard visually represents the performance of KPIs against benchmarks or goals. The most detailed KPI dashboard is at the lowest level of the company and the KPIs and related progress are consolidated as they move higher in the organization.

  1. Determine the parameters used to judge the performance against a goal. If you are 10% below your goal, should you take corrective action or just investigate? Should your company be 75% of the way to the target on September 30th or is your business seasonal (like retail) and only expected to be at 20% of the goal? The choice of percent vs. dollars isn’t critical to the success of the KPI dashboard, but rather that the KPIs are clear. Each person in the company should have the capacity and resources to reach their benchmarks.
  2. Determine a visual representation of the KPI at each level of the organization.
    • Department level – In the sales department, you may choose racehorses staggered with the “closest to goal” salesperson in the lead (whether the salesperson is closest to achieving the percent of the goal or the actual dollars). The achievement of the accounts receivable aging goal (reduce 90-day accounts to < 5% of total receivables) might show a trend line in green if it’s heading in the right direction or simply highlight the percent in red if going the wrong direction.
    • Senior management – The KPI dashboard may only show year-to-date sales with a color (red, yellow/amber, green) to show the progress. This KPI dashboard may not even reflect a report on the accounts receivable unless the A/R was off track or had a significant impact on cash flow. Consolidate data as you move up the hierarchy.
    • Some departments in your company may need more fun and competition to motivate them. Others may find success by staying focused on day-to-day performance. Keep the company culture and culture of the individual departments in mind as you plan your KPI dashboards.

Once a year, as part of your planning process, evaluate the efficacy and importance of the KPIs you’ve selected as your measurements. You may find the need to change them, add new indicators, and eliminate those that no longer add value. System improvements for data collection and evaluation can become part of the next year’s KPIs and should be added to your KPI dashboard to give you a constant snapshot of your company.

If the list of potential KPIs or keeping track of the data via a KPI dashboard still seems overwhelming, you’re welcome to contact me for a free 2-hour consultation.

Featured image and all post images licensed for use via Pxhere.

File Naming Conventions: Best Practices to Save Time (& Money)

Wondering how to set up file naming conventions for your company? Implementing file and folder organization saves your company time and money. Here’s how to organize your business files.
Dear CFO,
I am an accounting manager at small injection molding company. I’m also over the IT administration. Many of our employees complain they can’t find files in the system when they want them, myself included. I also have concerns about the security of some of the files. I am wondering if there are tips for filing best practices in a small company that might make this easier.
Can’t find it, Detroit

That has a familiar ring to it. In the small company I ran, finding files and information was a common problem until we established standard file naming conventions and filing procedures. The search for files and sorting through misinformation cost our company time and money. While establishing file naming conventions and filing procedures didn’t fully eliminate the problem, it did mitigate the costs substantially.

Looking for files is an insidious time waster; some estimates put this cost at $2000 to $6000 per year (and that sounds low to me). The estimated cost doesn’t include the frustration, poor decisions based on less-than-full information, or the reproduction’s variance from the original document.

Creating Folder Naming Conventions

Included in the process of setting up the file structure and file naming conventions is addressing the question of limiting access. We used Windows Small Business Server (now known as Windows Server Essentials) and were able to establish a hierarchical definition of the electronic file structure based on the roles of individuals.

Our directory structure cascaded security like this:

Executive – President only
Finance – President & Finance only
HR – President & Finance only
IT – Above plus outsourced IT
Sales — President, Finance and VP Sales only
Accounting – Above plus Accounting Clerical
Service Provider – Above plus Sales team members
Customer Communications – All team members, including temps and interns

Implementing file naming conventions across your company will save your business tons of time and money wasted on searching for files.
Image via Pixbay

Under each electronic folder were organized various subfolders adapted to our business. We created a clear definition of the types of information in each folder.

Depending on the size of your organization, this filing structure could be adapted to a department head and those under him or her, with filing organized by roles. So, if the Controller had a larger department with Accounts Payable, Accounts Receivable, and Cash Management working under them, the folders would be identified and secured by role.

When deciding on the file structure, consider internal controls, data protection requirements (especially if you are international and covered by GDPR or medical under HIPAA) and the level of transparency your company follows. In my company, most information was distributed on a “need to know” basis, but this may depend on your company culture among other factors.

To define your filing folders, first define what needs storage in the folders and by whom. It’s important to be specific when you create folder names as well. Filing Excel files in a folder called Excel and Word documents in a Word folder is unacceptable. Also, filing under individual names, on C drives, or memory sticks is verboten – keep your electronic files housed in a place where they’re regularly backed up.

A good method of defining the subfolders involves identifying the process-generating data, its form, and appropriate access (whom and how). The size and type of your business will also have an impact on the folder naming methods, as will the sophistication of your systems.

For example, let’s say you run a service company and your dispatcher needs to know if a customer has past due balance. In a sophisticated system, the past due balance might appear in the form of a red light on the screen with an amount to collect. In a smaller system, the dispatcher may have to access the customer’s account to find the past due balance, or to follow up with a copy of the invoice if the customer has further questions. A walk through of the needs in each process helps to frame the requirements.

The system capabilities drive another aspect of the filing. In the invoice example, does the system generating the invoice drop a single file for each day’s billing and simply place the dollar amount in the customer’s account (i.e. no drill-down capabilities to the invoice)? In that case, file the invoices into folders by day or month, not by customer name. If you generate a small number of large invoices manually, you may file them individually into a customer folder.

A word of caution on the folders: one of my bad habits is filing too deep. I used to have a folder with 4 or 5 levels of sub-folders. Unfortunately filing this deep results in misfiled documents, as well as too much “clicking” to get to the file you want. I would suggest instead, you create subfolders no deeper than 3 levels. If you still feel you need more categories, develop a better umbrella category and move the relevant folders to a new main category.

Establishing File Naming Conventions

Establishing file naming conventions requires thought as well. What is the best grouping for files: by date (year, day, month, time), by customer, by address or…? The choices for file groupings are endless. It’s important any files regularly accessed by multiple team members follow the defined file naming conventions.

However, choosing the right file naming conventions accomplishes these objectives:

  • The file naming groups common references together (customer, invoice, legal documents, etc.)
  • The file names are sequentially logical
  • The file naming convention is consistently followed

Grouping Common References Together

File naming conventions are the easiest way to keep track of files and stay organized in your business
Photo via Pxhere

Common references mean items you would commonly seek together. If you were seeking information on a customer account, again depending on your systems and departmental structure, possibilities include:

Where the customer is the most important point of reference:

Customer number_YYMMDD_Name of document (ex INV 556325)
Customer name_YYMMDD_Small claims court lawsuit
Customer number_YYMMDD_Notice of past due account
(Note: this date format is always sortable in date order by year within the customer number of name)

Where the system generates a file for invoices each billing date:


(Note: Even if the invoices were always put in a folder labeled billing, I recommend including a description in the file name; if there is a slip of the “click” the file is still identified as a billing file. If your system generates more than one file on a date, it’s often useful to have the invoice numbers identified on the file. For systems where invoices are stored within the system itself, obviously, there is no need for saving the files in a second location.)

Files for items like invoices for asset purchases depend on the type of business and type of asset. Cars and Trucks may use a VIN number and description, while large pieces of equipment may have serial numbers and descriptions. Furniture, on the other hand, may only require descriptions. In some systems, the invoice for asset purchase attaches to the original transaction within the system.

Larger companies with a high volume of equipment may put asset tags on all the equipment to identify it. Frequently the accounting department maintains the records. A key element of the file identifier is the date purchased, as the date of purchase drives tax reporting.

Examples of Assets by Date:

YYMMDD_Asset number_2Ton Crane
YYMMDD_VIN number_2018 Ford Explorer
YYMMDD_Steelcase Executive Desk

(Note: keep away from naming that might change, such as “Bill’s desk,” or “NE Corner Crane.” If you have multiple cranes or desks, consider tagging those assets)

File Names Are Sequentially Logical

What is the sequence you’ll most like search for: customer by date or date by customer?

Beer vendors, for example, use location as their key – there is always a bar at the location, even though the ownership might change– not the customer. Hence, much of their file naming is conventions include location. Within that file naming convention, there are still variations (12390 Greenfield Rd Waukesha WI or YYMMDD_WI_Waukesha_Greenfield_12390). This type of file naming convention is helpful if, by chance, you need to report all new locations in the state by the city as part of your annual reporting to the BATF.

The File Naming Convention is Consistently Followed

Everyone one needs to follow the rules. Period.

Remember your file naming conventions are only effective if they’re followed by everyone in the company, every time. This may mean you need to delegate responsibility to the department heads or another party who will quickly identify and raise the red flag if file naming starts running off the rails.

While the concept of implementing file naming conventions is somewhat “old school,” it is still a highly effective way to manage your document storage. Following company-wide file naming convention best practices will save you stress and headaches in the long run. The new paradigm of file storage and search that doesn’t rely on file name has cost well-beyond what most small companies are willing to spend.

Featured image via Pixabay. Images licensed for use via Pixabay and Pxhere.

How to Make Inventory Easier on Your Business

Inventory day is a big day for any business. Make inventory easier with these tips on how to better organize and manage the inventory process

Dear CFO,

As the controller in a very small manufacturing company, taking inventory is the worst job in the world (ok, maybe not the worst, but certainly tedious). The process itself is hard, but the reconciliations are even more difficult. My team uses information provided by the shop floor and sometimes I’m not sure if they really counted. What can I do to make inventory easier?

Inventory Not Managed in New England

You aren’t alone in your frustrations. New ERP (enterprise resource planning) systems can make inventory easier with real-time tracking. But keep in mind, these ERP systems are still dependent on good information. You know the old saying – garbage in/garbage out?

During inventory, many of the inputs are usually completed on the floor and not under your direct control, presenting another problem. Senior management must be involved in improving the inventory process. This takes us back to a discussion of policies and procedures. When there are clear policies and procedures with assigned responsibility, there are fewer errors and much less finger pointing.

How to Make Inventory Easier

Recording inventory is a time sensitive project so make sure your whole team is on board and following inventory procedures to make inventory easier
Photo by SparkFun Electronics

At the heart of it, an effective inventory process comes down to effective management. The discussion points below may seem so obvious and rudimentary that you can’t imagine they create problems, but you’d be surprised. So, let’s go through the tasks and resources included in a successful inventory procedure.

Timely and Accurate Recording in the Inventory System

  • Implement a policy stating who can order inventory and how much inventory they can order at a time. The policy should cover the types of materials and the dollar amount each team member has the authority to use when they purchase. If larger amounts of materials, inventory, or supplies are needed, who is responsible for the escalation? Sophisticated systems control spending policies with set dollar limits based on login authority.
  • Record part numbers for all inventoried items, typically called the Item Master. There should be a policy covering who can set up the numbers on new parts in the system, along with the numbering method and a procedure to record it consistently. Properly identify all the characteristics for each part in the inventory system. Characteristics in inventory systems include:
    • costing for purchase and pricing for sale,
    • units of measure for purchase and use/sale,
    • accounts for transactions,
    • descriptions for purchase and sale,
    • various other information related to vendors, serial numbers, bills of material etc.
  • Place purchase orders through the control system. This assures the recording of inventory orders happens under proper authority. Management can easily see open orders that might influence production or cash flow planning. (This is different than costing methods, which is another discussion.)
  • Receive inventory by recording through the system and against purchase orders, simultaneously implementing procedures to resolve short shipments or other issues. This enables accounts payable to process quickly knowing there is authority to pay for the amount ordered and at the price indicated. Make sure all inventory received prior to month end (or inventory date, if different) has the appropriate invoices processed.
  • Use a bill of materials. If your company makes a product repetitively, whether it’s an assembly, manufactured, or you’re running a construction company, identifying the parts used to make it and recording the bill of materials will automatically relieve inventory. In sophisticated systems, the recording is done as the part is processed. In other systems, a manual input may be required to “complete” the recording. Inventory procedures make clear who, what, where, and when to assure consistency.
  • Record all shipments of finished product through the system along with the related billing.

Physical Space Needed for Inventory

Having the proper storage space for your inventory is one way to make inventory easier for all involved
Photo by Pxhere
  • Control high-value items in a secure place to avoid tempting employees to “walk” off with them. For example, when copper is expensive, the copper wire should be locked in a cage. Not all team members should have access to all inventory.
  • Place high-volume items in an easy to reach space, neatly organized. Clearly label inventory locations. Clearly label all parts. This might require a number, description, or barcode. This inventory organization may also require bins, shelves, buckets, and other receptacles. Neatly organize lower volume and bulky items as well. Limit access to the inventory but ensure if someone is looking for a part, they’re able to find the RIGHT part.
  • If using a Kanban or other inventory staging type of process, allocate adequate space for the inventory staging. A corollary is to limit the amount of inventory movement. (I once had a client who lost a full order during production because someone didn’t put it in the right spot. Several months later, they found it.) Over-capacity is also an issue.
  • Segregate obsolete inventory and overstock inventory. Record your obsolete inventory and preferably sell it off. As an auditor, I once identified that based on current usage the client had 300+ years of a certain part. Don’t make this same inventory mistake! If you have consigned inventory, it should also be segregated.
  • Keep the workspace and production areas clear (I realize this is often a more involved process and there is a need to address the various means of getting inventory to where it is needed). Cell manufacturing looks different from production lines and assembly lines.
  • Use min/max capabilities of the inventory system to avoid keeping too much inventory on hand – an expensive proposition.

Implement Proper Cut-Off and Inventory Procedures

  • Pay attention to work in progress. If you have product that doesn’t complete in the measured timeframe, you must identify how much of the process is complete and properly attribute raw materials not yet relieved from inventory.
  • Measure all processes at the same point. Inventory received has an invoice recorded. Manufactured parts bills of material are processed. Shipments bill in the same timeframe as they are shipped.
  • Develop specific inventory procedures for your organization. This sample inventory procedure uses a pre-printed inventory sheet system and may be more complex than your company requires. Often pre-numbered inventory control tags are used.

Make Inventory Easier by Avoiding Garbage In/Garbage Out

Avoid a complicate inventory day with some simple procedures to help make inventory easier on your business and your team
Photo by SparkFun Electronics

If the policies and procedures defined above aren’t followed, taking the physical inventory, identifying and quantifying the differences becomes extremely time-consuming. That’s not to mention the possibility of generating larger book/physical adjustments. Common inventory problems include:

  • Items ordered in different units of measure than used and a system that doesn’t properly reflect the difference. For example, batteries are purchased by the box containing 4 and used individually. So, receiving 1 box isn’t the same as using 1 battery. Most systems will automatically record the conversion if the item master is set up correctly.
  • Variances in inventoried amounts. In less automated systems or where inventory is taken to a job site and the team members report the usage, it’s imperative that the released amount is compared to the used amount. Management must investigate significant variances, as well as make sure the inventory usage is recorded in the same period as it is actually used.
  • Shrink and theft due to poor oversight. Losses are inevitable without physical control of appealing (high-value, readily marketable, or useable) inventory that can “walk” away.
  • Poor inventory setup. Inventory setup is critical to maintaining the proper dollar account balance associated with the items in the physical inventory list. Make sure the pricing of the physical items is done using the same methodology of the general ledger account. If your dollars move in on a FIFO basis and the inventory list prices at average cost, there will be differences.
  • Inventory system settings that are changed too easily. The ease with which smaller accounting systems are changed is a double-edged sword. Setting security settings (somewhat limited in smaller systems) and turning on the audit trail will make it easier to trace who and when a number is changed.
  • Employee burnout. Physical inventories are tedious for everyone involved and as a result, may meet with resentment. Make inventory easier for everyone. Consider using a cycle counting process to count high value or high-volume items more frequently and lower value/volume less frequently. This does depend on systems in place that assure the completeness and accuracy of the inventory accounting. A cycle counting process is a win/win for all involved: if the activity is recorded timely and accurately, there is less work with the physical inventory.

While I have clients who still take a “full” physical every month, most businesses with proper policies, procedures, and oversight are able to limit the process. Inventory is a big job but there are certainly ways to make the inventory count easier for all involved. I hope your team leaders are willing to work with you to get policies and procedures in place as well as encourage compliance.

Featured image by SparkFun Electronics; post images licensed for use via Flickr CC 2.0 and Pxhere Public Domain.

How Can a CFO Establish Formal Closing Procedures? | RMR Analysts

Implementing formal closing procedures keeps your business running smoothly - no more missing data, reports, or extra time wasted.

Dear CFO,

I am the CFO of a mid-sized manufacturing company with three divisions. I am required to have “final” numbers to Senior Management by the 5th workday. It’s like pulling teeth to get the required information from everyone involved. I’m the one who looks bad when the numbers are late. How do I get the accountability without much authority?

Tired of the battle, Scarsdale, New York

I can empathize, having been in a similar situation. In my case, I was at Corporate and the division accounting people reported up through the division presidents; therefore, I had no direct authority to address the problems. Our issues included those stated in your question, as well as having to correct the poorly made journal entries (this was before the existence of auto-balancing and account verification within systems). That being said, the underlying problems were the same–all the accountability and none of the authority. This is a common delegation trap: where someone is given responsibility without the tools to complete it properly.

In my case, with the approval of the CEO, I took two actions to solve the problems (as I’ll outline below).

If you notice issues in the closing procedures, you may need to get involved with higher management to implement more effective procedures.
Image via Pixabay

Why should you get management involved and why should they care? While a CFO or Controller may drive the closing procedure and checklist, it’s done on the basis of establishing complete and accurate financial statements for all upper management decisions. The responsibility, as well as the need for accurate numbers, is companywide.

Good data (financial and other) is costly to accumulate and verify, but even more costly to correct; not to mention the cost of making a bad decision. Let’s say it costs your staff 10 hours to validate the KPI’s and financial data and the average pay is $40/hour, so the validation costs $400/month or $4,800/year.

Correcting that same data costs $48,000 and a single (just one!) corrective action is $480,000 under a data quality 1-10-100 rule first proposed by George Labovitz and Yu Sang Chang in the 90’s. Whether this rule holds or not, you can see bad data is very expensive and avoiding errors important.

Establishing Formal Closing Procedures and Checklists

After discussing our late closing issues with the division heads, I found they were having the same problems within the division. Information they needed wasn’t submitted in a timely manner and occasionally, it was also submitted inaccurately. They too suffered from facing responsibility without having enough authority. Oh… What to do?

A root cause of the problem was a lack of clear definitions of who was responsible for what task and in what timeframe. They needed a clear checklist and outlined formal closing procedure. It had to be written out and easy to follow, reference, and understand. While the initial process of establishing the formal closing procedures and checklist might seem tedious, the speed and accuracy of the monthly financials improves dramatically once the procedures are implemented.

Establishing a clear list of requirements, timeframes, and most importantly, responsibility cures the problem and eliminates finger-pointing. The checklist should include not only the process of the close but also the needed reports (exception reports) that identify where to look for problems. Each department in the company typically has some responsibility for “close” data, even sales. While there is a presumption all data is entered in a timely fashion (and we know that doesn’t always happen), implementing a clear formal closing procedure for the month’s end assures information needed for management decisions is complete, timely, and accurate.

The key to eliminating delay and implementing a successful formal closing procedure and checklist free of inaccuracies is getting buy-in from those in authority. Management must agree that the people identified are responsible and held accountable for accurate information submitted by the due dates established.

Setting Up the Formal Closing Procedures and Checklists

To set up the closing checklist, begin by thinking of all the roles in the company that affect the financial statements. The objective of the closing checklist is to collect complete information timely and accurately. Another benefit of the closing checklist is the opportunity for confirming internal controls (more about that subject in a future blog). The point is: think broadly.

  • Do sales reports reflect quotes that convert to invoices? Who does the conversion and how do they know that it’s time to invoice? What must happen to make sure these invoices are complete?
  • Are materials ordered directly by production or purchasing? How do you know if the orders are received and/or if the expenses are properly applied to jobs?
  • Does the warehouse record inventory ins and outs, as well as the counts accurately? How can you validate that the counts? Do you see any negative balances? Is the amount of the count out of line with previous adjustments?
  • Was all cash properly applied to accounts receivable? Are the number of credit memos appropriate? Has aging changed?
Here is a sample closing checklist.


Establish Needed Reporting and Analysis

Once formal closing procedures are established and reports begin to flow in more accurately, analysis is needed to determine the effectiveness of your new procedures.
Image via Pixabay

Once you’ve thought of the actions that feed the financial statements, identify the reports that would quickly identify issues. Exception reports identify variances from expected outcomes. There’s no need to identify and review every transaction. Identify how exceptions occur and then look for them. For example, unconverted orders over 30 days may flag a missed billing. However, in a company with manufacturing lead times of 6 weeks, the criteria may be orders over 45 days.

There is analysis and evaluation associated with reports, of course. The person analyzing the report should be the person closest to and/or responsible for the information. Measuring against benchmarks (KPIs) identifies issues and measures performance. For example, if the unconverted order is 60 days past due, the production manager may be aware of a problem obtaining special materials. (This should raise other questions on management broader than this blog.)

Assign a Due Date on All Information

Due dates are dependent on two factors: when information is available (or estimated) and the due dates of the subsequent reports. Often calculating the dates is a matter of backtracking the “need” for financials. I believe the objective should be to get the financial statements as soon as possible, preferably within 2 to 3 business days. While many modern accounting systems seemingly calculate in real time, the reality of the business process still requires some, albeit not significant manual intervention. Due dates usually reflect workdays.

Assign Responsibility for the Closing Checklist

Responsibility is NOT generalized at the department level – it’s assigned to a specific PERSON. This assignment of responsibility and accountability is part of establishing a strong, positive company culture. As Harry Truman said, “the buck stops here.” Or the more modern, “if it is everyone’s job, it is no one’s job.”

If the VP of Purchasing knows the most, then that is the person on the closing checklist. Always assign the person closest to the project as the responsible party for formal closing procedures.

Consequences Should Fall on Those Who Don’t Perform

Are your employees not performing their duties? Consequences should fall on those who don't perform - make sure your employees understand their responsibilities so that all tasks are covered.
Image via Pixabay

As I mentioned above, I had a similar problem with getting information for my company’s month-end closing. My department, as the last step in the process, was typically staying late every month attempting to correct and gather data not properly submitted. We were visible to senior management and had responsibility for corporate reporting.

It didn’t take long for me to realize, one of the reasons for non-performance was that all the consequences were on my department. The employees who submitted poor information were gone at 5 o’clock, while we stayed late to pick up the pieces. After attempting (and failing) several times to resolve the issues and encourage proper information, I had to take drastic action. Again, with the approval of the CEO and the Controller, we decided to let the chips fall where they may.

The result was chaos, but only once! When the division financials came out none of them bore any resemblance to reality… and then the phone calls started. I had a call from each of the division presidents within 10 or 15 minutes of issuance. I calmly explained I had processed the information their division submitted. Suddenly the lights went on! With clear, formal closing procedures implemented, everyone was held responsible for their department’s missing information and the gaps became clear.

As a result, the presidents started taking ownership of their individual divisions. And yes, when the division leadership started to hold their teams accountable our lives became easier (even if we still didn’t leave at 5pm, especially at the end of the month).

Implementing these formal closing procedures and the checklists will not only improve the experience of your team, but will provide consistent, accurate financials enabling timely decisions and accurate trending for decision making. Come month’s end, you won’t be pulling teeth to get the numbers you need to close your reports.

Featured image and post images licensed for use via Pixabay.

How to Set Up a Coherent Chart of Accounts

Putting together a chart of accounts is the necessary first step for any organization to create an efficient accounting system. Charts of accounts are useful for keeping data organized and tracking expenses for the company. However, not all businesses understand what a well-designed chart of accounts looks like. Here are useful tips for setting up a coherent chart of accounts.

Dear CFO,

My Controller drops all of the financial reporting to Excel every month to produce meaningful financial statements.  Why can’t my accounting system generate the reports I need?

–Frustrated by the Extra Work, Orange County, CA

You are right! Many controllers, bookkeepers and sometimes CFOs forget about the chart of accounts, getting themselves caught in a manual process to produce financial statements. In my experience, outside of system limitations, there are two primary reasons: a poorly designed chart of accounts and the sub-category of that – too many accounts along with inconsistent use. Now, as you roll your eyes, I will show you WHY thinking about the design of your chart of accounts is critical to meaningful financial reporting.

Most people don’t give a second thought to their chart of accounts and either design ad hoc or load a preconfigured chart of accounts from their accounting system.  While most accounting systems create a passable balance sheet, (due to the similarity of all balance sheets) the income statement accounts are much more variable. Typically, the income statement accounts vary based on the type of business and the markets, geography, and structure as well as cost drivers of the company.

What is a Chart of Accounts?

Merriam Webster defines a chart of accounts as “a list of account names arranged systematically and usually coded numerically or alphabetically or both to form the general framework of the accounting system of a specific business and to establish a scheme of account classification.”

While this definition is merely a baseline, when used correctly a chart of accounts provides the ability to analyze the business from different perspectives while enabling quick, efficient reporting and analysis.

Here’s Where to Start with Your Chart of Accounts

A spreadsheet with financials and bills next to a chart of sales and revenue.
Photo by Shopify Partners

The design of your chart of accounts drives much of the basic financial analysis directly available in your accounting system. To set up an effective chart of accounts, ask these questions before thinking about anything else. Remember, don’t be overwhelmed; you’ll likely not have the answers to all of these. Start by asking yourself what financial reporting you need to run your business:

  • Do you have different product lines that have or could have different margins?
  • What activities are the cost drivers of your business? In a service business, this is people. In a manufacturing business, it’s likely raw materials, labor and manufacturing overhead.
  • Do you have individual departments who are responsible for budgets?
  • Do you have separate departments you need to hold accountable?
  • Do you have branch locations you want to measure separately?
  • Which costs do you include in your cost of goods sold versus the overhead of the company typically referred to as SG&A (selling, general and administrative)?
  • Which costs combine to create a more meaningful analysis?

While some of these questions seem to be for much larger companies, you’d be surprised at what I’ve seen over the years.

Questions to ask about combining costs:

  • Would it make sense to combine rent, utilities and reimbursed parking as Occupancy expense or does reimbursed parking belong with employee benefits? If you can choose the option of a suburban location with free parking, would you consider the occupancy expense reduced or the employee benefits?
  • Which costs are significant or should be combined into categories to provide meaningful analysis?
  • You have a few products that sell into both the consumer and the B2B market, would you want to consider grouping sales and related costs into the distribution channels in addition to the product line by type of product?
  • Would you want to combine branches into regions?
  • Might you sell or spin off some portion of the business in the future? How will you identify what you are selling?

Answering these questions helps to define the chart numbering system. BEWARE of getting too complicated – this will result in the too many accounts problem stated above.

Check the Capabilities of the Accounting System

Whether you already own one or you’re considering a new accounting system, ask these questions:

  • How many characters are available in the account number field?
  • Are they alpha-numeric, just numeric with complete flexibility as to structure or do they have defined segments? For example, some systems may read the first 6 digits as account number and the next 3 digits as department number, etc. Your design thinking should incorporate this. Other systems may allow you to identify segments you are using, effectively hard-coding how the system reads the account number.
  • Does the report writing only allow grouping consecutive accounts or does it allow adding accounts in a different sequence within a group? TAKE CAUTION, pulling non-consecutive accounts into reporting often results in extra work and increases the probability of errors when the charts of accounts change.
  • Are you able to drop reports to Excel? This is an important feature because there are always management requirements, especially ad hoc detailed analysis that don’t lend themselves to creating reports in the system.
  • Does the reporting system allow masking in the reports? Masking generally allows you to use a wildcard character such as an asterisk (*) to add flexibility to your reporting options.
  • Can you revise account names after importing either the standard chart of accounts or your own?
  • Does the system include a separate account field or use the description as the “account?” If this is the case in your system, consider using a numeric scheme as part of the description; that’s how it will appear in the financial statements and numeric allows for grouping.
  • Are you able to renumber and/or rename accounts? Business environments require constant change, if new groupings make sense, some systems (such as Sage 50) let you renumber accounts. This allows for more continuity and comparability of financials. Additionally, this feature helps avoid a problem I encountered when a Plant Manager deliberately avoided comparable financial statements by changing his chart of accounts every other year.

Segment the Account Structure

Calculator with a chart of investment accounts.
Photo by stevepb

After answering all these questions to identify what you need and filtering your answers through the system capabilities, you’re officially ready to start setting up your account structure – NOT the chart of accounts, but the structure.

The next step is to decide how you’ll use what is available to you within the system. For example, Sage 50 offers 15 characters in the chart of accounts and you don’t need to use all of them. We can explore options such as:

  • 5001M01 – 4-digit account, 1-digit branch, 2-digits department enables reporting by branch and department
  • 50000050B – 5-digit account, 2 digits department, 1-digit customer type (Consumer/Business) allows department and customer type reporting
  • 5000050M01 – 5-digit account, 2-digit product line, 1-digit branch, 2-digit department enables product line, branch and department reporting
  • 5000-M-01 – 4-digit account, 1-digit branch, 2-digits where your system allows formal segmentation of the account (my preference – specified segments are easier to read and should mean fewer classification errors. The segments can be used for whatever fits best with your business.)

For most small companies, a 4 or 5-digit account number is more than adequate. Adding department, branch and product line digits can prove to be very useful depending on your answers to the questions above. To quote the movie Sabrina, “sometimes more is just more.”  Make sure the account structure fits the needs of the company and doesn’t over complicate things (and possibly break the numbers into such tiny pieces they become meaningless). For example, let’s say you have 3 distinct product lines, consider that in the set-up but don’t report on anything until the numbers are meaningful.

Numbering and Setting Up Your Chart of Accounts

You can finally get started on actually setting up the chart… but wait!  There are certain conventions to guide your start.

As I mentioned before, Balance Sheet accounts are more consistent across companies and industries.  Balance sheet accounts start with the following:

  1. Representing Assets (Cash, Bank Accounts, Accounts Receivable, Equipment, Short and Long-Term Other Assets)
  2. Representing Liabilities (Accounts Payable, Debt, Customer Deposits, Short and Long-Term Other Liabilities)
  3. Representing the Equity Section (Capital, Retained Earnings, Owner Distributions, Dividend Distributions, etc.)

The income statement has significantly more variability once you get past the gross margin (Revenue – Cost of Goods Sold) line.  Above it, the numbering stays fairly consistent. Generally speaking, income statement accounts begin with:

  1. Represents Sales (Revenue, Returns, and Allowances)
  2. Represents Costs of Goods Sold (Materials, Direct & Indirect Labor, Manufacturing Overhead, or in a service industry it would be costs of providing yourservicese such as salaries, licenses, computer rental or other direct costs for providing the service)

After the gross margin, starting with 6 and ending with those starting with 9, the accounts are used in the order of magnitude the costs represent.

Sequencing Your Chart of Accounts

Now it’s really time to set up the Chart of Accounts, right? NOPE!

While the numbering conventions and order of magnitude provide guides, there is only one final step (I promise). The sequence of numbering is important, somewhat on the balance sheet and significantly on the income statement. To allow for the system to provide informative financial statements, be sure the accounts you want grouped for reporting are numbered in the same range. For example, salaries and Benefits might be a large cost and this could lead to multiple accounts tracking related expenses. If you reserve the 6000s accounts for this, the detail accounts might look like this:


Account Number Dept Description
 6100 50 Admin – Salaries
6200 50 Payroll Taxes
6300 50 Employee Benefits
6350 50 Bonuses
6100 60 Sales – Salaries
6200 60 Payroll Taxes
6300 60 Employee Benefits
6350 60 Bonuses

In this example, the sales department is 60 and 50 is administrative.

Since smaller accounting systems only allow a sequential range of account numbers when writing reports, this sequence will allow a meaningful line item called Payroll and Benefits using accounts 6100 to 6400 as a sequence. Utilizing masking will allow you to run separate reports on the sales and administrative departments.

NOW you’re really ready to set up your Chart of Accounts!

A man reviewing a chart of accounts, looking stressed out.
Photo by caio_triana

Final Tips

  • Don’t set up too many accounts. Accounts with one or two entries in the whole year and/or the total of the entries are insignificant dollars shouldn’t include a separate account unless it’s an audit or compliance (tax) reporting requirement such as meals and entertainment.
  • Leave room in your numbering. It’s very likely you haven’t thought of everything (surprise)! There are likely accounts you missed and will think of later that should be in between accounts you’ve already set up; keep this in mind when numbering your chart of accounts.
  • Review your current system for ideas or the standard charts provided in your accounting system. Some systems produce reasonably good chart of accounts. If you see the chart meets 90% of your needs, go ahead and use it, ensuring you remember to make revisions for the other 10%. Chances are if the numbering works and the system allows editing of the account name, it may be the quickest way to get going.
  • Develop a standard naming convention. Use consistent titles and formats. For example:


Sales Salaries
Sales Payroll Taxes
Sales Benefits

Or (my preference):

Salaries – Sales
Salaries – Admin
Payroll Taxes – Sales

Or just salaries, payroll taxes and benefits and let the account number (department) tell you which.


Sales Salaries
Salaries – Admin
Payroll Taxes

  • Always include Account Numbers. A few smaller systems don’t use an account number which I think largely limits your reporting capabilities. If you’re able to, see if you can add numbers as part of the account name.
  • Be consistent in what you put into an account. If the rent goes into the Office Rent account one month and into Other Expenses the next, you’ll spend time trying to find out if you paid rent and when you run financials, they won’t look right. Most systems offer a default account in vendor, customer, item and other maintenance areas; use them if the activity always goes to the same account. The utility bill for your office is a great example of this.
  • Make a Balance Sheet. Some “easy to use” online systems don’t include balance sheets. In my opinion as a VERY experienced financial exec, this is a big miss. For teeny service or cash basis businesses, it may not matter, but for everyone who isn’t charging a credit card immediately and who pays those outside the company/handles merchandise, this is imperative. Not watching the balance sheet (especially in times of growth) has caused many businesses to fail.
  • Make sure you properly identify the type of account. The type of account will be used to create the statement of cash flows – a very important benchmark of company progress (more on this in another blog).
  • If you don’t want to or can’t wrap your head around this… HIRE SOMEONE. In terms of running your business and knowing your financial trends, product line profitability and overall company stability, setting up an excellent chart of accounts is key. Doing this well will save innumerable hours and improve the ability to make good long-term decisions within your business.
  • Define what is supposed to be in each account. Whoever does the coding and processing in the accounting system should clarify what goes into each account. This avoids errors and provides consistency across timeframes for better analysis of your company. A helpful example might be, does getting to the trade show get coded to Trade Show Expense or Travel Expense?

What Difference Does a Chart of Accounts Really Make?

You want your financial statements organized and easy to read; including only good information will lead to only good decisions. A list of accounts isn’t a sufficient income statement and summarizing expense items into one single line doesn’t meet the necessary criteria for success.  A good chart of accounts allows the appropriate level of detail, supports grouping and analyzing trends at a high enough level to be meaningful and helps you stay prepared for whatever comes next.

Featured image by Matthew Henry. All photos licensed via Burst and Pixabay.